Dear All
Spring is here but there is serious turmoil in the world. Welcome to the next fiscal year.
We originally planned to send out our thoughts on the Budget but that is an incredibly crowded space. Within minutes of whoever the current Chancellor is sitting down, a full summary is available online and hours later, glossy well written commentary is being emailed by numerous authors. We really do not have much to add. We will discuss the Budget implications with each of you individually at your next review. In any event, the bigger story was always the demise of Silicon Valley Bank and Credit Suisse.
During Budget times my contemporaries and I remember sending students over to London to pick up the Budget notes – this was pre-internet – and sitting around a table with tax partners late into the night devising a newsletter that the printer (a person not a machine) then collected in person, printed overnight and had ready for distribution the following morning. And it was all rose tinted nonsense.
While those old patterns of production and behaviour have nearly gone for good, the habit of banking crises remains stubbornly difficult to shake. Banking is not an easy business. Essentially, I deposit money in a bank – fairly confident that if I want it, I can take that money back out. The bank then lends that money for example to my son and his wife for 25 years to buy a flat. With shareholders hungry for a profit and a dividend, the bank may choose not to lend my son the money but instead invest in some scheme that looks like a good bet. As soon as I get nervous and ask to withdraw my money and publicise my concerns, the bank is in trouble. Banking is inherently a pretty difficult business and we really should be less surprised by banking crises – they are not hugely unusual.
Although banks are very handy, they are utterly dependent on confidence. Almost everyone reading this note was an adult in 2008 – the year of the last big, banking crisis. And most will remember Barings going under in the mid-1990s thanks apparently to (Watford lad) Nick Leeson. Are the current circumstances the same as say 2008? Yes of course there are similarities, particularly with the rushed saving of Bear Stearns which was bought by JP Morgan and UBS’ purchase of Credit Suisse. But there are key differences too. Banks’ balance sheets appear very different (stronger) than 2008. And great swathes of non performing mortgages have not been minced up, repackaged and sold on.
All the same, banks depend on confidence. And confidence is wobbling. Why was there such a worry about Deutsche Bank? I cannot find anything more credible than nervousness.
Investments in equities and property are of course very different beasts in comparison to bank deposits. You all have investment portfolios where Satis advise. In the event of Satis (or Hillier Hopkins, or Transact, or other parties) going bankrupt your investments are not on those businesses’ balance sheets and available to creditors. This is a key difference when it comes to banks. Subject to state forced insurance and legislative safety nets, bank deposits are at risk if a bank goes bust.
Please do not interpret this as advice to move money from bank deposits to equities and property. I have a healthy bank balance and I will be leaving it there. The money I need on deposit to make me feel secure has not altered because an obscure US bank (SVB) has collapsed and been bought by another bank, famed for its money laundering activities (HSBC); or because a bank long ago famed for its money laundering activities (Credit Suisse) has been bought by another bank once famed for its tax avoidance activities (UBS). I like to have a specific sum on deposit. The rest is mostly invested in equities and property.
What does the next 12 months hold in store for us? I really do not know but there seem to be a lot of factors to worry about, and worry breeds uncertainty, and uncertainty breeds volatility. In the UK there is much to be miserable about – PPE, the Metropolitan Police, the honours fiascos, interest rates, energy bills and so on. In global terms we are small beer (great brand by the way – and a B Corp) – UK listed equities make up less than 5% of global equities. And a similar proportion of your portfolios. What really matters are global worries – and we have those too. The really big ones are inflation and Ukraine. A little way behind is a loss of confidence in the US banking system. Me and my generation have been the happy beneficiaries of cheap Chinese labour for 20 or 30 years. This has helped to control inflation. If the US and developed Europe decide they wish to be less dependent on a country that can still not bring itself to condemn Russia’s invasion of Ukraine, and decide to be more self sufficient in goods, or food, or anything currently made in China, then the result, is likely to be inflationary. Andrew Bailey’s extraordinary BBC interview in which he (effectively) asked firms not to put up prices beggars belief.
The situation in Ukraine is desperate but the UK and mainland Europe are using far less Russian oil and gas than they were two years ago. China’s position remains unclear. There is creeping dissatisfaction with democracy all over the developed world (this is not a baseless assertion – many academic papers concur).
All of these factors ultimately feed into volatility for your portfolios. We should expect this.
To close is there anything to be cheerful about?
Yes, there is lots to be cheerful about but in the context of this note, the fact that the UK is not quite in a ‘technical’ recession is a surprise to most. The definition is a bit silly and old but let’s not get bogged down on that topic. It was only last summer that the Bank of England predicted a recession. Since then we have had the surely Armando Iannucci inspired Truss/ Kwarteng double act, a major run on UK gilts and still we have not quite tipped into recession. Also, the banking jitters of the last few days will dampen central bankers’ resolve to raise interest rates. And, the recent Budget’s plan to remove the Lifetime Allowance from pension legislation (even if temporary) provides even more planning opportunities for our clients. (Though it is very unlikely to achieve its stated aim – to prevent people retiring early.)
In conclusion, the next year will probably be characterised by volatility. Watch out for inflation. The recession risk has not gone away. For our clients, tax rates for the next few years will rise, regardless of which political party is in power.
If you would like to agree or disagree or discuss any the above, do not hesitate to contact me.