WHAT THE AUTUMN STATEMENT MEANS FOR INVESTORS
Relevant to: the bulls, the bears, and you; how to play the gilt market; how to understand economic trends; investing in UK property.
At first sight, not much. Although it contained no less than 59 individual policy announcements, only two of them directly concerned individual investors, and neither comes into effect until next April. The full title of the document is the Autumn Economic Statement, but in fact this was almost entirely a political performance, and it is there that the real significance for investors lies.
The two specific investor-related measures coming into effect in April 2014 are:
• the abolition of stamp duty on shares purchased by Exchange Traded Funds, in an attempt to woo some of them out of Luxembourg and Dublin and back to the City
• tax relief on “social investment” – investment in equities or bonds linked to charities, community-interest and community-benefit companies. It is assumed the incentives will be similar to those for Enterprise Investment Schemes or Venture Capital Trusts, but may not be finalised until the full Budget.
The first may give a small boost to an already booming industry – but one which some believe, being derivative-based, is already marketing products with higher risks than many investors appreciate.
The government hopes the second may unleash up to £100m a year extra for charities and social enterprises, to give some more tangible muscle to David Cameron’s “Big Society” concept.
But the impact of both will be small against the overall implications of the broader economic framework unveiled in the Statement.
This is that the independent Office for Budget Responsibility thinks the UK economy will grow at a faster rate than its post war average for each of the next 5 years. It is this which enables the OBR to predict that the national debt will start falling as a percentage of GDP while the debt itself will, by definition, continue to increase each year until the annual deficit is finally eradicated, now hopefully by 2018; three years later than the Chancellor forecast when he first came to office.
BASIS FOR A BULL MARKET?
Investors’ first reaction will be that this should underpin a sustainable bull market. That may indeed be correct but for two factors:
• the sustainability of a debt-financed recovery; and
• the impact of firstly the end, and secondly the unwinding of Quantitative Easing.
The current economic recovery appears to be financed entirely by running down savings and running up debt. Back in the 1970s Labour Chancellor Dennis Healey famously remarked he viewed this phenomenon in the same way he would seeing his mother-in-law drive his car over a cliff.
In its way it is good news: a sign that consumers are once more confident of the economic future and job prospects. But although personal debt levels are not yet back to where they were before 2007, it is not long before the Governor of the Bank of England is likely to be showing the same concern about the effect on the overall economy as he did with the government’s Help to Buy scheme on house prices.
Many economists argue that current asset levels – stockmarkets, house prices – represent a classic asset bubble, artificially inflated by the impact of the billions of pounds of money which the Bank of England has pumped into the banks through QE, and which it thinks it is going to get back one day. That this will mean higher interest rates is no secret, but the inevitable accompanying collapse in gilt prices is something about which current buyers seem in total denial.
What all that may mean for the stockmarket is less clear. Conventionally as interest rates rise, shares are seen as less attractive, though interest rates have some way to rise before they even equal the current yields on many good quality shares.
But intuitively if QE has created asset bubbles, then in some ways the bull market which ought to accompany a strongly growing economy may already have happened, to the extent the market might have stayed a good deal lower for a good deal longer if the QE programme had not been started in 2009; or at the very least, will severely limit the scope of the next bull market.
And there are some worrying harbingers – primarily from the other side of the Atlantic, which still often provides financial writing on the wall for the rest of the world. The feeding frenzy for Twitter shares in November on a valuation reminiscent of those at the height of the dotcom boom was a symptom of a booming and largely undiscriminating market for Initial Public Offerings, reflected to a degree in the UK by the massive oversubscription for Royal Mail shares. The danger is that investors become indiscriminate, and companies which would normally find it difficult to raise money are able to attract investors, simply because the average investor has nowhere else to go except bank cash deposits which yield virtually nothing.
But more worrying is evidence from America, where the rules on disclosure are ahead of the UK, that more founder investors in IPOs are selling some of their their shares during the normal 180 day “lock-up” period. This is a restrictive period normally applied to prevent new investors being taken for a ride.
According to Dealogic, no less than 26 US-listed companies have raised over US$7bn from share sales within the normal 6 month period during which founder sales are normally prohibited. Permission for such sales has to be granted by the underwriting banks who do so if they believe such sales will not affect the price short term. They also have an incentive to do so in the form of fresh fees from often substantial shareholdings which need to be privately placed.
Figure 1 shows that this level is now higher than at the height of the dotcom boom, with the exception of the very low volume year in 2008.
As with the banks underwriting Royal Mail, companies have an incentive to underprice their IPOs so they can convince the underwriters to let them offload more of their shares early. When insiders are looking to dump their shares and cash out, the rest of us should take note: and sooner than most of us did in 2000.
BACK TO POLITICS
The Autumn Statement was the first real shot of the 2015 election campaign. By including action to reallocate some of the Green costs from energy bills to general taxation, it is clear utility companies are going to remain a political football until the election, and possibly beyond. The same may also apply to rail and bus company shares which are also likely to come under pressure in the continuing “cost of living crisis” debate which Labour has successfully highlighted.
The only comfort is that when in office, political parties of either hue realise very quickly that if they want to mobilise private investment for public enterprises such as fuel generation, investors have to expect some predictable return on their capital, and one which is not subject to periodic political interference.