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Find out more about MYJAR today at (   Tue, 10 Dec 2013 09:46:11 +0100 Liverpool’s West Tower development proves popular Nearly half of apartments at Liverpool’s West Tower ( have been sold within just weeks of the scheme being launched, its owners have revealed. London-based Delph Property Group, which invests in prestige residential properties, has announced that it has agreed 43 sales since the start of January, making the scheme one of the fastest selling in the history of Liverpool’s city centre residential market. The firm said the 40-storey building’s luxury two-bedroom apartments, which are on the market from £130,000, have proved particularly popular with current tenants, as well as owner occupiers and investors looking to capitalise on Liverpool’s thriving rental market. Delph acquired the freehold to the landmark tower from Grant Thornton in December 2012 after its developer Beetham collapsed into administration with just 17 of the 123 apartments sold. The investment is Delph’s first in the north of England. The company is currently refurbishing the apartments to an as new condition and improving and updating the building’s common areas. (To find out more, click here ( Richard Forman, head of sales and marketing for Delph, said: “The building was effectively put into stasis with the administration, depriving buyers of the chance to acquire apartments. As a result the relaunch has been greatly anticipated by buyers looking to invest in this landmark building. “We acquired West Tower because we realised its potential and knew local buyers and investors would want to own part of one of the city’s most iconic buildings. The competitive pricing, yields of nearly 8%, high quality specification and the stunning views are obviously proving too tempting to owner occupiers and investors alike. The response we are receiving from buyers is excellent.” Jones Lang LaSalle was appointed lead agent for the scheme after securing the deal to sell the building to Delph on behalf of administrators Grant Thornton. Martyn Green, director and head of residential at Jones Lang LaSalle in Liverpool, said: “Many schemes would struggle to sell this many in a year, let alone one month, so this is a very positive sign both for West Tower itself and the health of Liverpool city centre’s residential market.” As a sales incentive Delph is offering to pay the stamp duty tax for anybody looking to purchase in the next month. West Tower was completed in 2007 and boasts views across the city, over the Mersey to the Wirral and as far as Blackpool on a clear day. The building’s 34th floor is home to the Panoramic – Britain’s highest restaurant. To find out more about West Tower and the opportunities it offers for buyers and investors click here . Thu, 07 Mar 2013 11:42:26 +0100 Expats shun UK investing Expat investors are choosing to invest money in their local economy fearing that UK economic recovery is three to five years away.Lloyds TSB International said only 7% of expat investors think the UK economy has a positive outlook for the next six months while 14% believed its prospects are positive over the next year. Only over a three to five year time frame is there a balance of positive over negative sentiment towards the UK economy.Expats are much more upbeat about their local economies with 29% thinking the outlook is positive in the next six months. Over a 12 month timeframe expat investors are upbeat on balance about their local economies with 42% saying the outlook is positive, while only 26% say negative. Britons living in Switzerland, Canada and Germany are most upbeat about their local economies while expats in Spain are overwhelmingly the most downbeat, followed by France and South Africa. Given their more positive stance on their local economies many expat investors are increasing their local stock market investments with 29% investing more in the past six months, against only 14% who reduced their investments. Some 13% also increased their US stock market exposure with 6% decreasing it against only 6% who increased their UK stock investments with 7% reducing them.A further 29% of expat investors plan on buying more local stocks in the next six months with only 8% planning a reduction. “The UK is starting to pick itself up out of recession and is dusting itself down,” said Richard Musty, Lloyds TSB International private bank director. “But while the economy is now moving in the right direction it may take time before it hits its stride. Certainly, the majority of expat investors think the UK is treading a long road to recovery and despite deep-seated problems in many popular expat locations like the Eurozone expats do have a more favourable view of their local markets.”  Ashish Misra, head of investments at Lloyds TSB Private Banking said: “Tellingly expats are also putting their money where their mouth is and investing locally – about five times as many people are investing more in their local markets than those who are investing in Sterling. “With regards to US equities, the looming ‘fiscal cliff’ – the deadline after which automatic tax increases and spending cuts kick in – is the greatest cause for concern among investors. It is crucial that the Republicans and Democrats agree a deal before the New Year to stave off the threat of recession arising from deadlocked negotiations to balance the government’s books. “European equities in contrast look relatively better value despite the challenges posed by the sovereign debt crisis. Indeed our current view is that European equities will enjoy a period of outperforming both their UK and US counterparts.” Tue, 11 Dec 2012 12:43:46 +0100 IFAs back property as pension option Two out of three IFAs believe UK residential property would be a valuable investment option for pension investors, housing investment and shared equity mortgage provider Castle Trust claims.Its nationwide study of financial advisers found 63% believe access to UK residential property investment would help investors with pension planning.However more than two out of five (42%) are concerned that the minimum investment required to invest in UK residential property, typically through buy-to-let, is a major barrier for most investors.Around a third (31%) of IFAs themselves currently invest in UK residential property excluding their own homes, Castle Trust’s research shows.Currently investors in Self-Invested Personal Pensions cannot invest directly in UK residential property but can use Castle Trust’s HouSAs to invest in UK residential property from as little as £1,000. HouSAs are income and growth investment products linked to the Halifax House Price Index with returns that beat the Index, whether it rises or fallsSean Oldfield, chief executive officer at Castle Trust, said: “Financial advisers recognise the value of UK residential property as a valuable diversifier in a portfolio but are concerned about having to invest in bricks and mortar to do so.“House prices and household incomes are inherently linked over the long term making housing ideal for pension portfolios that need to keep pace with wage inflation.“A fixed-term investment such as HouSAs can be used when you have a specific goal in mind, which is clearly the case for SIPP investors. They can include housing returns in their pension planning without having to consider downsizing their home when they stop work.”Castle Trust’s HouSAs can be taken out for terms of three, five or ten years with investment from £1,000 to £1 million. The Castle Trust Income HouSA tracks any rise or fall in the Halifax House Price Index and also pays an annual income of between 2% and 3%, depending on the term of the investment. The Castle Trust Growth HouSA offers a gain of between 1.25 times and 1.7 times any increase in the Halifax House Price Index or a loss of between 0.75 times and 0.3 times any decline.   Tue, 11 Dec 2012 12:39:26 +0100 Isle of Man to share tax info he Isle of Man government has confirmed that it will be adopting tax information sharing arrangements with the United Kingdom which will follow closely the FATCA intergovernmental agreement currently being negotiated with the United States. Chief Minister Allan Bell MHK said: “The nature of tax cooperation is changing and, as I made clear in my Agenda for Change speech to Tynwald in October, automatic exchange is becoming the global standard. The Island already shares tax information automatically under the EU Savings Directive and has recently announced that it will do so on a wider basis with the USA. “This decision is a well-considered next step in the Island’s long-established policy of commitment to being at the forefront of tax transparency and international cooperation.  “The Isle of Man has achieved global recognition for its proven record of compliance with current international standards of tax co-operation, with the OECD reporting to the G20 last year that the Island was one of only a few jurisdictions with all the elements of effective tax information exchange in place. “At the same time the Financial Stability Board placed the Isle of Man in the highest category of co-operative jurisdictions strongly adhering to international standards of co-operation and information exchange.“Continuing with this approach, it is logical for the Isle of Man to embrace new forms of tax cooperation with our largest trading partner, the UK.”This means that the Isle of Man government will work together with the UK government on concluding a number of measures which will enhance tax transparency as part of their shared commitment to combat tax evasion and financial crime. The two governments will adopt new enhanced reciprocal tax information sharing arrangements under which they will automatically exchange information on tax residents on an annual basis. To minimise the burden on financial institutions the approach will follow as closely as practicable the Model Intergovernmental Agreement reached between the UK and the United States of America and will be concluded to the same timetable as the agreement between the Isle of Man and the United States. Bell added: “As a small International Business Centre, the Isle of Man seeks to work in partnership with our key economic allies to compete for global business. It is therefore essential that we also work together to achieve international standards of regulation.  “By clarifying our intentions, we can give business confidence about our direction of travel, so that together we can build a sustainable future for the Island’s economy.“We will be working closely with our Isle of Man based businesses and the UK government to ensure measured and cost-effective implementation of this agreement.  I look forward to announcing further details of how we are achieving this over the coming weeks.” Fri, 07 Dec 2012 11:50:31 +0100 Fund managers sanguine on US cliff resolution Fund managers believe that the US has a fair chance of recovery once the looming fiscal cliff issue is resolved, the latest S&P Capital IQ fund research claims.Concerns over the imminent US fiscal cliff have influenced market behaviour and had an impact both on short-term investment decisions of US equity funds and long-term expectations. Fund managers are concerned about the long-term drag on the US economy as determined by agreed tax increases and spending cuts. In the short term portfolio managers believe that the government will take action before the year-end to head off the fiscal cliff but they expect difficult decisions regarding increased taxation and spending cuts to spill over into 2013.In view of the continued insecurity portfolio managers have focused on structural growth names and companies that are able to grow through self-help. They have also focused on high-conviction stocks, which in some cases led to a reduction in the total number of holdings (as seen in the BNP Paribas L1 Opportunities USA and the Neuberger Berman US Large Cap Growth funds).Managers focused on the longer term are generally maintaining their discipline and using the opportunity to purchase more of their favoured names as prices become attractive.While the exact timing of the US recovery is as yet uncertain, S&P said there is clear potential for the US equity market to move forward significantly once the fiscal cliff has been avoided and investors again focus on future growth. Although this is expected to decrease, S&P Capital IQ GDP estimates for 2013 stand at 2.3% as of November 2012. Should the fiscal cliff be avoided, the US recovery is widely accepted as being sustainable, given the relative health of the financial system, a clear move off the bottom in terms of the housing market, low energy costs, and the likelihood of continued accommodative interest rate policy. In addition, valuations are attractive, with the S&P 500 index standing at an undemanding 12.49x 2013 operating earnings based on S&P Capital IQ bottom-up consensus earnings estimates as at 29 November 2012. Wed, 05 Dec 2012 13:16:07 +0100 Guernsey funds business continues to grow The total value of funds business in Guernsey grew by £3.6bn (1.3%) during the third quarter of the year.New figures from the Guernsey Financial Services Commission show that the third quarter increase has built on the £9.4bn growth during the first half of the year to take the total net asset value of funds under management and administration in the Island to £274.4bn at the end of September 2012. This represents an increase of £3.3bn (1.2%) year on year, a rise of £31.3bn (12.8%) on the same time two years ago and an increase of £92.9bn (51.2%) since the end of September 2009.Fiona Le Poidevin, chief executive of Guernsey Finance – the promotional agency for the Island’s finance industry, said: “It is encouraging to see continued growth in the Guernsey funds sector. We have now enjoyed three consecutive quarters of growth since the beginning of 2012 and we hope that this trend will continue. It shows confidence in our services at a time when market conditions, particularly in the Eurozone, remain challenging and investors continue to display a certain degree of caution.”The figures from the GFSC also show that the Guernsey closed-ended sector was valued at £130.3bn at the end of September – up £4.2bn (3.3%) during the third three months of 2012 and up £4.6bn (3.7%) compared to twelve months earlier. Guernsey domiciled open-ended funds reached a net asset value of £51.5bn at the end of September 2012, which was a decrease of £1.6bn (3.2%) during the quarter and down £5.6bn (10%) year on year. Non-Guernsey schemes, where some aspect of management, administration or custody is carried out in the Island, grew by £1bn (1%) during the quarter to reach £92.6bn at the end of September 2012, which is £4.6bn (5.2%) higher than the value at the end of September 2011.Le Poidevin said: “Further increases in closed-ended funds and non-Guernsey schemes reflect our current strengths in these areas and match with what industry is reporting to us anecdotally. We note the decline in open-ended funds and will monitor this position going forward.”Horace Camp, chairman of the Guernsey Investment Fund Association, added: "We note the decline in numbers and values of open-ended funds and a number of initiatives are under way to reverse this trend, chief amongst these is Guernsey’s proposed new AIFMD compliant regime. In addition the proposed changes to the non-Guernsey schemes will reinforce success in another important sector of our comprehensive offering." Wed, 05 Dec 2012 13:08:05 +0100 Strong outlook for German equities Share price valuations for the German market remain attractive on both a relative and historic basis, generally offering “strong earnings growth and the likelihood for superior earnings in the future”, Baring Asset Management claims.  The investment firm said German corporates continue to benefit from positive underlying domestic economic fundamentals and strong demand for their goods and services globally – fuelling its view that there is money to be made.  Rob Smith, manager of the Baring German Growth Trust, said: “Our outlook for German equities continues to be supported by what we see as improving economic and corporate fundamentals for the continent’s biggest economy. This is despite a generally tougher environment for European equities in 2012  “From where we stand, Germany benefits from a number of positive macroeconomic drivers, including strong employment data, a high savings ratio, well-maintained corporate balance sheets, and competitive in-demand exports which are increasingly directed towards a recovering US economy and improving Chinese economy.   “On this last point, Germany’s share of exports to markets outside of Europe compares favourably against rival economies on the continent. This upward trend is based, amongst other things, on the competitiveness, quality and desirability of what it exports.”  Looking at the past five years, German exports as a share of total EU-17 exports have grown from around 31% as of Q1 2007 to a third (33%) as of Q1 2012.   Similarly, Germany’s share of EU-17 exports to countries outside of the EU has risen from 23% in Q1 2007 to over 25% as of Q1 20122.   The signs indicate that this growth is set to continue as German goods continue to be in demand from customers in both developed and developing economies.  Evidence of a better outlook for German equities can be found, said Barings, in the performance of the country’s equity market against a broader index for European equities.   Over the three months to November 23 2012, the DAX 30 index gained 5.1% in euro terms, against 3.8% for the MSCI Europe ex-UK index over the same investment period.   Building on strong momentum, the Baring German Growth Trust has returned 15.7% year-to-date.   Smith added: “Within the Baring German Growth Trust, we invest in large, medium and small-sized companies and argue the portfolio continues to be more diversified as a consequence.   "We believe our stock specific skills have come to the fore during times of general investor aversion to European risk assets.   “Here, we have actively-shifted from focusing on very large companies to more nimble medium and small companies.  In terms of sectors, we see attractive opportunities in Financials, Healthcare, and Information Technology.  “Looking to 2013, there are some key themes that we find attractive especially within the context of an improving US and Chinese economic outlook.   “We like the increasing trend of German suppliers in the automotive industry developing their products within an emerging markets context, especially China, as it makes the production process more cost-efficient with the help of new robot technology made in Germany.   “Portfolio holding Duerr AG is one example of a German niche manufacturer with a strong footprint in China, and looking to capture rising demand for its labour-saving products. Another theme identified through our detailed stock research is what we see as the potential benefits of a reindustrialising US economy for specialist German companies.” Wed, 05 Dec 2012 09:47:42 +0100 Financial worries seep into 2013 Some 57% of high net worth individuals believe managing their finances next year will be as difficult or worse than this year.In a YouGov poll on behalf of Duncan Lawrie Private Bank 39% of those with over £250,000 of investable assets said 2013 would be more difficult than this year from a financial point of view and a further 18% were unable to make a call either way. Matthew Parden, managing director of Duncan Lawrie Private Bank, said: “The UK has had an uncertain 2012. The situation in Europe has continued to cause consternation; interest rates have continued to be anchored at rock bottom levels; and crises in the banking industry have caused further deterioration in the trust levels of consumers.“Clearly, while HNWIs benefit from a certain level of financial security, the results indicate another flat year for the majority of people in the UK who have suffered the same economic challenges in recent years. The results signal a strong need for banks to reconnect with their customers to help and support them through challenging times. Their main aim now should be to work with and help clients plan for a more fruitful 2013.” Tue, 04 Dec 2012 17:30:08 +0100 Multiple pension pots lose money Over 10 million people with multiple personal pension pots risk paying higher charges and receiving poorer returns by failing to consolidate their pensions under one roof, warns Investec Wealth & Investment.Its research reveals that only one in five people holding more than one pension plans to bring their assets into one plan over the next 12 months.  This is despite the fact the vast majority admitted to having a limited grasp of how their pensions are managed: four in five respondents said they knew either a little or very little about how their pension money had been invested across different asset classes and the level of risk taken.More than one in five UK consumers (22%) holds more than one personal pension (i.e. excluding state pension) and almost a third of workers aged over 55+ have between two and five personal pensions, compared to 8% of people aged between 18-34. Meanwhile well over a quarter of men (28%) hold two or more personal pensions compared to 13% of women.One of the core benefits of a Self Invested Personal Pension is the ability to better manage pension assets under one roof yet IW&I’s research has found that significant numbers of people are unaware of this key advantage.Chris Aitken, head of financial planning at Investec Wealth & Investment, said: “By the time most professional people have reached middle age they are likely to have built up a number of different pension plans collectively containing an array of individual funds with various risk/return objectives and asset allocation models.  By transferring their pension plans into a single SIPP, they can simplify a costly and inefficient retirement planning process and the administration required to manage it.“SIPPs offer numerous advantages to many people planning for their retirement. These include tax benefits, easy switching of funds, flexible investment options, and the ability to self-manage as much (or as little) of their pension as they like. It’s worrying that over two thirds of respondents said it was unlikely they would attempt to consolidate their numerous pensions, with the remaining 13% saying they were unsure. While SIPPs are not suitable for everyone, it’s clear that millions could be missing out on the huge advantages SIPPs can provide.” Tue, 04 Dec 2012 17:25:54 +0100 Viewpoint: Eurozone may have bottomed By Rupert Watson, investment expert at Skandia“While the outlook for the Eurozone remains rotten, it is possible that we are past the worst in terms of economic growth. Economic data appears to have stabilised, with a slightly better performance likely next year.“The Eurozone economy has been in or near recession for all of this year, with its economy likely to have contracted in the current quarter. “However, we think it likely that growth next year will be better. After a flat performance in the first half of the year, we expect positive growth in the second half. While this won’t be enough to cause anyone to crack open the champagne it will at least be better than this year.The better performance is likely to be the result of three main factors. First, there will be less fiscal tightening next year, especially in Spain and Italy. “Second, the recent moves by the European Central Bank to support peripheral bond markets have led to a significant easing in funding conditions across the periphery. “Third, the expected recovery in the global economy should boost exports.“Last Friday’s stronger than expected German IFO business confidence report suggests that Germany has already bottomed and should return to growth at the start of next year. “Other economies may take a little longer to start growing but confidence across the region should start to return next year.” Mon, 26 Nov 2012 14:44:22 +0100 Another proposal for pensions The Centre for Policy Studies has issued a report proposing the annual contribution limits for ISA and tax-relieved  pension saving be combined into a single limit of between £30,000 and £40,000. This would represent a relatively small reduction in the cost of the financial incentives of between £1.8bn and £600m while the full limit should be available for ISA saving, it said.It also proposed shelving higher rate tax relief thereby  saving £7bn annually but as a partial quid pro quo the report suggests reinstating the 10p tax rebate on pension assets’ dividends and interest income, at a cost of roughly £4bn per year.And it suggested replacing the 25% tax-free lump sum concession with a 5% “top-up” of the pension pot, paid prior to annuitisation which it said would be cost neutral.But Tom McPhail, head of pensions research at Hargreaves Lansdowne, said while the report has many interesting ideas it was “unlikely any of them would ever work in the real world”. He said: “There is a simple three stage test for this kind of package of ideas: will they be at least fiscally neutral? Will they encourage long term saving across all levels of society? Will they be at least as simple as the current system? These proposals fail at least two of these three tests.”McPhail said echoing the dictum often attributed to Churchill about democracy, the current system of pension tax reliefs is “the worst possible system, apart from all the others that have already been tried”.“Now is not the time to be trying to experiment with radical and potentially destabilising changes to the pension system,” he added.Hargreaves Lansdowne said most people consider their ISA and pension savings as separate pots for different purposes. The firm said it liked the idea of offering investors more flexibility but believed pensions still offer the best route for most people to save for retirement: the combination of tax benefits and restrictions on access work positively for investors.  And it said “taking a sledgehammer to the tax relief rules” just as auto-enrolment is starting would “seriously hamper what is a hugely positive revolution in retirement funding”.  “There is also a call to end salary sacrifice which is just a nonsense – salary sacrifice works because it makes saving into a pension much easier. Salary sacrifice is often tied up with other benefits such as childcare vouchers, car parking, additional holiday etc, so separating pensions out will create additional cost and complexity,” added the firm. “As we have seen in the past, any attempt to divorce tax relief rates from income tax rates just leads to bureaucratic complexity.”Hargreaves Lansdowne also suggested the CPS idea of replacing the 25% tax free cash lump sum with a 5% enhancement of the pension pot was neither simple nor sensible.“It provides a purely academic argument to what, for the investor, is an emotive issue,” it added. “Benefits and lump sums accrued to date would need to be preserved, so this would take 40 or so years to work through the system. This would create additional administration and ring-fencing, causing additional costs for pension providers which would then be passed onto the consumer and HMRC. Transfers between providers would become more complex and onerous.”  The firm said cutting the tax-free cash sum (known as Pension Commencement Lump Sum) would be a large nail in the private pension coffin.“One of the biggest problems with pensions is people don’t trust Governments to leave the rules alone. The best thing the government could do right now is exactly that; nothing,” it added. Mon, 26 Nov 2012 14:35:14 +0100 Art investing for novices Fitzrovia-based Gallery DIFFERENT has started an art club designed to help inexperienced buyers benefit from the returns on investment available in the contemporary art market.  The art club offers exclusivity to invited members with the opportunity to tap into expert insights on artists and the value of their works, provide inside knowledge on trends and a secondary market for works. Karina Phillips, co-owner and director of Gallery DIFFERENT, said: “The art club market seems to be divided into two types: clubs which demand very high entry stakes and purchase works as a collective or those that are run more as social clubs. “The DIFFERENT Art Buyers’ Club will be run as a collective but members will individually own the art they purchase. They will be advised on the comparative investment value of various artists and  likely future performance in order to better assess risk. “As with all investments  the value can go down as well as up. However typically the act of buying and supporting an artist will actively influence the performance of the owned art. “The DIFFERENT Art Buyers’ Club provides a way for wealth managers to assist their clients to diversify their portfolios.”Prospective club members will be invited to attend club evenings where the gallery will present artworks and detailed portfolios from a diverse selection of artists who will have been chosen with investment potential in mind.  This could include rising stars as well as 20th century masters and works costing in the range of £2,000 to £100,000 and beyond.  Membership of the club is attained when the member makes an acquisition. The member will own that work and have control over it and can opt either to take delivery of the work, or to leave it to be managed by the gallery.  There will also be events such as talks from art and financial experts, artist demonstrations and regular newsletters.Phillips added: “We are aware that wealth managers and independent financial advisers may be asked for advice by clients interested in investing in the art market which has proved highly lucrative.  “While you should always buy what you like, having an inside track can guide better decisions.  One of our key objectives is to overcome the knowledge barrier and enable wealth managers to offer art investments to their art loving clients with a clearer idea of risk and potential. Referral fees will be  payable when a referred client makes an acquisition.”The inaugural meeting of the DIFFERENT Art Buyers’ Club is to be held at the end of November.   Mon, 26 Nov 2012 14:28:28 +0100 Q&A: Investor outlook 2013 John Greenwood, chief economist at Invesco and Nick Mustoe, CIO at Invesco Perpetual, provide their global economic outlook.POST-ELECTION SITUATION IN THE US Q - What impact will President Obama’s re-election have on monetary and fiscal policy in the US?JG - On the monetary side, I do not think there are going to be many changes.  Mr Bernanke will continue at the Fed.  You will remember that Mitt Romney had proposed to depose him.  That will not happen.  Bernanke will continue until January 2014.  The Fed is set on quantitative easing (QE) for the foreseeable future, so I do not think there will be much change on the monetary side.  On the fiscal side, first of all, Tim Geithner, the Treasury Secretary, is retiring; second, we have a big debate going on, on the fiscal cliff and the upcoming changes for the US on the budget; but more generally, on a longer-term basis, I think that under Obama we are likely to continue to have budget deficits for the foreseeable future, so we are not going to have drastic austerity any time soon.Q - Is the re-election of President Obama good or bad news for US companies, and what about the US dollar?NM - I think it is pretty neutral overall.  The agenda, really, for Obama is going to be the same as it would be for Romney, in that there has to be some fiscal adjustment made, so that is what everyone is focusing on at the moment.  The key thing however – and the broader issues, which are probably as important – is what is happening within the US economy.  It is not just the fiscal situation, but also about the obvious improvement that we are seeing in the housing market and the real bonanza that is starting to come from oil and gas.  I think we should keep that balanced picture of what is driving corporate earnings at the moment.Q - After the US election result, what is the likelihood of a realistic agreement regarding the fiscal cliff?  JG - We have had both President Obama and the Speaker of the House, Representative Boehner, saying that they had a constructive discussion last Friday.  If you take the fiscal cliff overall – that is, both the automatic tax increases and the automatic spending cuts which will come into force – it amounts to about $615 billion, or about 3.5% of GDP.  That would be a very serious hit to growth and economic prospects for the US in 2013.  I, myself, think that they will reach agreement but not on the full extent of it.  I think we will see probably a fiscal cliff which is reduced to 1-1.5% of GDP; perhaps $200-250 billion, rather than the $620 billion that seemed likely.  I think there are good prospects of an agreement but there will still be some tightening of fiscal policy going forward.Q - How will deficit-reduction measures in the US impact on global stock markets?  JG - Globally, we have budget deficits and the need to address them in the eurozone, in the UK and the US: a prolonged period, essentially, of balance-sheet repair in the private sector which is now having knock-on effects in the public sector.  I think we are going to be in that environment for several more years in all the major economies.  This is not something that we are going to suddenly emerge from and find that, in 2013 or 2014, all is roses.  Those budgetary stresses are going to continue to be part of the economic background, but what we focus on is more the private sector and the growth and improvement which is happening there.NM - I think that, provided we do not have a severe retrenchment in spending – a real belt-tightening of a material amount – the effect is going to be marginal.  We have, as I said earlier, lots of good things happening within the US economy, and we have other economies going through the same process, so I think it is something that can be worked through.QE AND INFLATIONQ - Will further QE in the developed economies lead to widespread inflation?  How would they begin to unwind such a massive monetary stimulus?JG - Many people have this impression that QE automatically means inflation.  Japan is the only country that has pursed QE for any extended period of time.  Between 2001 and 2006, it pursued it for five years consecutively, and Japan has not had inflation – it has had deflation.  The reason is that, during that period, the private sector was deleveraging – it did not want to borrow and it was repaying debt.  Therefore, bank balances did not grow, credit did not grow and money did not grow.  We had slow money growth, despite QE.  It looks as though we are getting almost exactly the same set of phenomena; that is, central banks doing QE but commercial banks reluctant to lend, reluctant to grow their balance sheets, and trying to improve the quality of their balance sheets.  Therefore, my view is that, despite the angst about it in the markets, we will not get any severe inflation resulting from this.  I expect continued low rates of inflation. On the unwinding question, there are four main ways to unwind it: they can raise interest rates; they can sell bonds – both of those would be quite traumatic; more likely, they are going to start paying interest on the big reserves that are held at the central banks; or they will raise reserve requirements, so that the banks cannot lend the excess money.  Either of those latter two would be relatively market-neutral.US STOCK MARKETQ - What do you think of US equity valuations at the moment?  Will they pull back towards European levels?  Is it possible that this is the start of a long period where you will want an increased exposure to the US?  NM - During this whole phase post financial crisis, the US stock market has done very well.  It has been the best performing of the major markets, for very clear reasons: not just a flight to dollar assets at a time of risk, but also the economic recovery and the better performance from US companies, so there are very good reasons for it.  The valuation overall on US equities, in the very high teens when you look at the aggregate numbers, is probably in line with the long-run average and, on an EBITDA basis, half that level, so about average as well.  You would, then, have to say the US market looks pretty fair value.  I have to say, in terms of looking at what is interesting around the globe, there are other markets that look more attractive on a valuation basis.  I think Europe has traded at a big discount for some time, despite the rally that we have had through the summer, given the obvious focus on the euro crisis, but also Japan, trading at very low historic valuations.  When you look at the overall asset-allocation piece, there are markets that look marginally more attractive than the US, but the US looks okay.CHINESE ECONOMYQ - Has China avoided a hard landing?  Do we know yet?JG - I would say it has.  The problem is in the official data for the GDP, which, frankly, are pretty unreliable.  China has moved to a new administration, which will come into office in March.  The new premier, Li Qeqiang, has a very interesting view on this.  He has said that the GDP numbers are unreliable, and what he does is to use a proxy, which I have reconstructed, based on electricity, freight volumes and real loan volumes.  If you use those sorts of numbers, it looks as though the Chinese economy has bottomed out at about 4-5% growth and is now stabilising.  It is, then, quite a bit lower than the official numbers, but nevertheless it looks as though it is bottoming out.NM - I think, corporately, that is what we see as well in terms of the message from companies.  The early signs are good.Q - Are we getting any closer to seeing the Chinese economy rebalanced away from exports towards being focused on consumption?JG - I think there are a couple of really important things that have happened, not just in the last six months or so but over the last three or four years.  The exchange rate has appreciated steadily against the US dollar and other currencies, which has reduced China’s overall competitiveness.  In addition, there have been big wage increases over the last two or three years.  The net results of those things has been that, first of all, the current-account surplus has declined from 10% of GDP at the peak to just 3% of GDP today.  That is a huge decline.  China is not running the massive surpluses that it was before.Second, the best indication of this is what has happened to Chinese foreign-exchange reserves.  Over the past year, China’s foreign-exchange reserves have not increased one iota; in other words, we have had a capital outflow equalling or offsetting the current-account surplus.  On that basis, then, it looks as if most of the needed rebalancing has been achieved.  There is still a lot more to be done in terms of increasing the consumption share of GDP, but I think that the headline-grabbing antagonisms that there were between the US and China should be much less in the second Obama Administration.Q - Are they going to have problems increasing domestic consumption?  There is lots of unsold property in China at the moment, apparently.JG - Yes, I think it will take many years to change the economic model, but the egregious surpluses and so on are over for the time being.UK ECONOMYQ - Is austerity working in the UK?  Is it likely to work?  Will the public continue to accept it?  If not, what is the next option?  Are we emerging from recession in the UK or could we be slipping back towards a third dip?  JG - First of all, on the growth outlook, to use Mervyn King’s phrase, I think the economy will continue to zig and zag.  I do not think that we are at the start of a new surge in growth just because we had one quarter of good figures in the third quarter.  The underlying problem is the repair of balance sheets.  Britain went into this whole downturn with more leveraged banks, more leveraged consumers and a government that had run deficits for six or seven years in good times, so that there was no cash in the till to put into stimulus programmes in the recovery.  I do not think and have never thought that this was going to be a quick recovery, and I think we are going to see more of this slow, gradual improvement.  The most important thing for the government now is to try to get the inflation rate under control, not to impose additional fuel duties or taxes and things like that, because it was higher inflation which eroded consumer incomes and caused the economy to be weakest last year and the early part of this year.  Having said all that, I think that the growth outlook is going to be slightly better than it has been over the last year or so, but, in this environment of slow balance-sheet repair, I am not looking for a sudden surge in growth or a sudden boost to liquidity.  Those things are not going to happen in this environment.Q - Triple-dip recession is a scary thought: do you see that as a possibility at all?NM - It is always a possibility but it is less likely, I think.  I agree with John: this is a multiyear process and there is no quick fix.  If we look at some the barometers of whether austerity is working and whether people will accept it, unemployment has stayed pretty constant at below 8%, in contrast to parts of Europe; for example, Spanish unemployment is at 25%.  From a UK-electorate point of view, then, although it is not pleasant medicine, it is certainly within bounds.  I suppose a scarier thought for us in terms of the longer-term growth outlook is that we are only partway through the austerity cuts: we still have two thirds of the planned cuts to happen in the next three years.  What we build into our expectations, then, is very subdued growth.Q - Quantitative Easing (QE) in the UK looks like it is going to be happening for a while longer.  When do you see the market looking past QE?NM - I think we go through phases.  Every time we have QE, markets rally and feel better, and you have a short-term positive impact, and then the market goes back to fundamentals, looking at valuations and what the key drivers are.  We have had a pretty strong period of QE and liquidity over the summer, right the way from Draghi’s announcement in the summer, with the announcement of further QE from the Bank of England and the Fed, and also the Japanese authorities, so we have had a big market rally, a lot of liquidity and QE, which have felt good, but now we are starting to see the hangover of that.  Markets have traded back in the last few weeks, because it comes back to whether this has really changed anything in fundamental terms.  The answer is no, but it engenders a better feeling for investors.  The answer to the question, then, is that the market will always come back to what the fundamentals are and what the valuations are, and those have to be the key drivers.Q - On the medium-term horizon, do you expect to see inflation, deflation or even hyperinflation in the UK?JG - I think we will continue to have low inflation.  In the last two years, we have had inflation much higher than some of our trading partners – as high as just over 5% on the CPI measure.  That phase is over.  We now have a background of tight money and credit – that is, very low rates of growth of broad money and credit, and even declines in those numbers – for the past two to three years, and it is much more difficult for companies to raise their prices, so the prospect of really high inflation or hyperinflation is just not there.  When you have balance-sheet repair going on, people do not want to borrow and, if banks also do not want to lend or are not lending aggressively, you cannot have the rapid money and credit growth that fuels rapid inflation, so I discount that scenario altogether. On the other side, I do not think we are going to have deflation, because the Bank of England will continue to make sure that there is enough liquidity to grow the economy.  After all, they have an inflation target of 2%. We are much more likely, then, over the next couple of years, to see the inflation rate broadly in the band of between 3-1% rather than 5-3%, as we had before.UK STOCK SELECTIONQ - How do you rate more defensive stocks against more cyclical stocks?  Are high-yielding equities now overpriced, as everyone clamoured for them in the search for income?NM - Given the background that we are talking about, I am pretty happy to have dependable earnings, but it all comes to valuation: what you pay for it.  A lot of defensive stocks do not look expensive at the moment.  Given the pullback that we have had in those names relative to the cyclical areas, financials have done incredibly well, given this liquidity rush that we have had since the summer.  Ironically, then, a lot of the defensive names look more attractive than they did previously, but it all comes down to valuation.  High-yield can sometimes be an illusion.  My mantra is normally: buy a sensible yield that can grow.  You are looking for good cash flows and good dividend increases over time, which is a much more sensible paradigm.Q - High-yield can be an illusion in the sense that it may not necessarily be sustainable?NM - Correct – absolutely.BANKING SECTORQ - Are any of your fund managers actively looking to invest in the UK and/or European bank equities at the sector level?  What are your views on bank debt, particularly subordinated debt, where some of your bond funds are exposed?NM - A lot of things have happened in the banking sector over the last three to four years, and most of the changes that have happened have really been to the benefit of bondholders.  There has been a tremendous process of deleveraging going on within the banks.  They all have to shrink their balance sheets and get themselves in much better shape.  For example, the recent RBS figures characterise this well.  They brought their leverage ratio down from 28 times to about 15 times since the crisis, they have shrunk their balance sheet by £700 billion, and they have taken their Tier 1 capital ratio from four to 11.  This is pretty typical of what UK and European banks have been doing.  This is great for bondholders but not very good for equity-holders.  Equity returns are still very subdued and we are only partway through the process, so it is still pretty difficult to see a bonanza period for equity-holders.EUROZONE CRISISQ - Will the eurozone survive?  If not, will it be brought down by bailout fatigue or austerity fatigue?  JG - It has long been my view that the stresses and strains for some of the peripherals of remaining in the euro will ultimately be too great.  At the moment, Greece is struggling to meet the conditions that it needs to meet and, therefore, the troika is delaying payment of the final tranche of an instalment payment.  The fundamental problem is that, with the extreme austerity that has been imposed, these countries are seeing their GDP declining, so the ratio of debt to GDP is increasing rather than declining, which is just putting off even further the day when they can start to expand and grow again.  All of that means that, despite the eurozone leadership wanting to keep everything together, there is still a risk that one or more of the countries could ultimately exit.  I do not, therefore, think we are completely out of the woods as far as the breakup is concerned, although the propaganda from Mr Draghi and the eurozone leadership has been very strong.  It could, however, still unravel, although I do not think that that is imminent.Q - How damaging would be the loss of a single weaker member to the eurozone as a whole?  Might it be beneficial, possibly?JG - I think it would possibly be beneficial, ultimately, to that individual country, although, initially, there would be pain from devaluation and so on, and reneging on their debt is also going to have severe consequences.  The pain on the other side, however, is also going to be very severe.  Keeping these countries in means we are going to have a very prolonged period of stagnation, recession, very low growth and high unemployment in the southern periphery of Europe.  Basically those countries are going to have to be supported with repeated bailout programmes from the north, so nobody should be under any illusion about how costly this choice of the eurozone leaders to keep it together is going to be to the eurozone as a whole.Q - Is the euro a flawed concept, bearing in mind that both Greece and Germany could be considered better off outside the eurozone?NM - I think we all recognise that, in theory, it is flawed but we are stuck with it.  The member states are stuck with the problem that has been created, but coming out or a breakup of the euro is extremely disruptive and costly, so I think all of the countries involved see that they have to find a solution.  This is something where, I guess, John and I disagree.  I think it is very much less likely that we will have a breakup.  I think there is a tremendous political will to make this succeed.  I think a lot of the actions have been taken, particularly in the last year, and the change in leadership at the European Central Bank (ECB) have really heralded quite a lot of fundamental reforms that do not fix things overnight or change the dynamics of growth or debt, but do give some chance of some stability.  It is not going to be pretty and there is a lot to do, but I think it will work through.Q - How can austerity measures make southern Europe competitive when German unit-labour costs are 25% lower?NM - I think it is already happening.  We have to remember that Germany, a few years ago, went through its process of becoming competitive on the world stage, and that is why it is in such a good shape now.  This process has just started, really, in southern Europe.  There has been a lot of progress within Italy and Spain in terms of labour reforms.  A lot of labour practices are being swept away in terms of the influence of trade unions – severance payments on redundancy – so, all of the necessary things that you have to unpick to make labour costs much lower are happening.  It is the beginning of that phase.  I think that the respective governments know that this is an absolute imperative.  If there is to be any chance of pulling this off, it has to be about creating competitive conditions and creating growth.JG - The story I always tell is that, in Hong Kong, after the Asian crisis of 1997-98, it took Hong Kong six years, from 1998 to 2004 to become competitive again.  They did not devalue.  Of course, Greece, Portugal and Spain etc cannot devalue.  Hong Kong is highly flexible and very dynamic, and it grows quite rapidly.  The problem in the southern European economies is that they are much less dynamic and they need all these reforms, so, given that it took Hong Kong six years, we are looking at a very long process for southern Europe.EUROPEAN CENTRAL BANKQ - Mr Draghi appears to have done enough to ensure that the eurozone will hold together, but what are the recessionary implications of staying together?  JG - The recession in the southern European economies persists.  Growth has been negligible.  Greece is now in its sixth year of recession.  For the periphery, then, it remains very painful.  We are also seeing the core gradually being contaminated, so that exports from France or Germany, which were going to the periphery, have slowed down, and growth in the core has also been slowing recently.  Fundamentally, because the ECB has been so restrictive, it has been difficult for banks to expand their balance sheets, and the ECB itself, in my view, has been less expansionary than either the Bank of England (BoE) or the Federal Reserve (Fed).  More needs to be done by the ECB, by Draghi and the Governing Council, but there is this roadblock of the Bundesbank.  The Germans are very antagonistic towards easing things up, but that is what they need to do if they are going to overcome the forces of deleveraging and cost-reduction in the periphery, and prevent that from contaminating the core.Q - Is the latest outright monetary transactions (OMT) policy just another fudge from the ECB?  JG - OMT has not been used because it requires the applicant country – it could be Spain or Italy, for example – to submit to an external programme of debt reduction, austerity and so on.  Of course, the Spanish have been reluctant to do that.  In the meantime, the benefits of lower rates have come their way anyway, so why should they submit to this kind of externally administered programme?  I think a key point about OMT which is not often made is that any purchases of bonds by the ECB are, under the agreement, due to be sterilised, so it is not going to have the massive liquidity-injecting effects that I think the market had possibly anticipated.  Even when it does happen, then, I think we have to be cautious.  There will be a big effect initially in terms of expectations and so on, but, in terms of easing up liquidity and enabling Europe to start to regenerate growth, I am much less optimistic on that.EARNINGS IN UK & EUROPEQ - How do you think consumer spending is going to impact earnings in the UK and Europe?NM - Given the current policies, one would expect consumer spending to still be subdued, but one of the interesting things that has been very obvious within the pricing of retail stocks in the markets is that a lot of this gets discounted and baked into forecasts.  Nobody can expect a bonanza period, and things are going to be pretty tight, but there are interesting opportunities within the makeup of that consumer-spending profile over time.                EQUITIES – CHEAP OR EXPENSIVE?Q - Equities look quite expensive on some measures but quite cheap on others.  Should we be concerned that everyone is now telling us we should be investing in equities?NM - Equities have been the unloved asset class for at least a decade.  I think that, because we have had a period of a few months where people have said that equities now look oversold, it would be premature to be cautious.  It is very clear that, when you look at stock valuations, both individually and in aggregate, there are a lot of very attractive companies on very low valuations, very good dividend yields and very strong balance sheets.  One of the key differences between today and previous poor economic conditions is that companies are in very good shape, with a lot of cash, which gives them the ability to add value, particularly to shareholders, through higher dividends and share buybacks etc.  Equities, then, really are very unloved and very attractive.  We have had a systematic disinvestment by pension funds, partially through de-risking but also through regulation, so I think that the tide has been so massively one way that equities do look very attractive.BOND BUBBLE?Q - There has been talk recently of a bond bubble bursting.  Has that prospect been pushed onto the horizon or should we be concerned right now?NM - The term ‘bubble’ conjures up all sorts of things like the TMT collapse in prices.  I think it is too emotive a term, so I certainly discount that.  I think it is true to say, though, that, when you look at a large part of the bond market trading at very low yields – core government bonds trading below 2%; over 50% of the non-financial corporate-bond market trading below 2% – you would have to say that those parts of the market look poor investments and very poor value.  There are other areas of the bond market that are still okay: financials still look very attractive, not just in terms of valuation but all the fundamentals, and the deleveraging that I have mentioned already, but also the fact that the capital base is shrinking.  Banks are buying in their expensive debt at a rate of knots.  In the last year, we have had something like 500 tenders retiring €251 billion in the eurozone of bank capital, so it is a shrinking supply at a decent yield.  There are, then, areas that still look attractive within bonds, but the safe-haven areas really look poor investments.Q - Briefly, do you see any reason for being worried about bonds at the moment?JG - One of the fundamental drivers for bonds is the inflation outlook.  Credit matters a lot but, as far as the inflation outlook is concerned, I am not at all worried about inflation suddenly picking up or, for that matter, growth suddenly picking up.  In the past, either a sudden resurgence of growth or a rapid pickup of inflation have been major red signals for the bond market, but neither of those is in prospect for any of the major areas – the US, the UK or the eurozone – at the moment.CONCLUSIONS Q - Pulling all this together, what do you think are the key issues that will influence the outlook for bond and equity markets?JG - I would continue to stress this balance-sheet-repair process.  Households and financial institutions became very heavily overleveraged going into the crisis – or that was the reason for the crisis – and the repair of their balance sheets is taking a long time.  For the households, it takes even longer, so we are going to be in this environment of slow growth, or slower-than-normal growth, with low credit growth, low money growth and relatively low inflation for a long period of time.  That is the sort of framework that we are in.  I do not think that there are big risks, as I said, of a sudden jump in inflation or a sudden spurt in growth.  Those things are going to be much more subdued for probably several years ahead.NM - The key comes back to valuation, looking at equities and fixed income.  You have to be very careful about what you are buying and at what price.  There are lots of interesting things within equities at the moment, but a big driver for this will be the behaviour of corporates: what they do with their cash and their cash flow going forward.  That will be a big theme in terms of whether companies do the right thing and return cash, increase dividends, and have a focus very much on shareholder return. Fri, 23 Nov 2012 11:57:28 +0100 Investors risk being scammed A national campaign launched today by Action Fraud warns UK investors they risk losing thousands of pounds if they fail to take simple steps to check who they're investing with.It is estimated that £1.2bn is lost nationally to investment fraud every year. The campaign, The Devil's in Their Details, advises investors of the steps they can take to identify and avoid these scams.Peter Wilson, director at the National Fraud Authority which runs Action Fraud, said: “Some of the biggest personal fraud losses reported to police are from investors, a group that we think of as savvy and entrepreneurial.“Our intelligence shows that amounts ranging between £10K to over £1m are being handed over to fraudsters by victims. This loss is likely to be permanent and will not only deal a life-changing blow to the victims, but possibly their family and their business.“Before investing large sums of money everyone should take a step back and consider if it sounds too good to be true, it probably is. The Action Fraud website contains simple steps people can take to prevent them from losing hard earned money.”The National Fraud Authority is an executive agency of the Home Office and focuses on tackling fraud across the UK. Wed, 21 Nov 2012 17:22:04 +0100 L&G Investment view: battling headwinds Legal & General Investment Management believes the global economy has troughed but it’s not expecting a bounce in growth by the end of this year.This is LGIM’s macroeconomic snapshot.“October was a month in which markets were generally stuck in their ranges as the buoyancy provided by central bank action deflated.“Upcoming political changes in both the US and China were considered potential catalysts for market movements, but Hurricane Sandy struck in October which added to the significant headwinds currently facing the US.The LGIM view“Global overview: whilst we continue to believe that the third quarter will mark the trough for global growth, we do not foresee a significant bounce in growth data for the fourth quarter, owing to both storm Sandy and quarterly euro zone fluctuations.“Global capital expenditure continues to slow, and when combined with a modest inventory cycle, this has driven an overall trade slowdown. “Although global consumption and services have held up better, our central case expectation remains ‘muddle through’ (i.e. sub-trend growth rather than recession). “Looking at 2013, we continue to think that the consensus is materially underestimating the effect of the fiscal cliff on US growth, while for emerging markets we are above consensus views on growth.“US: US data surprised significantly to the upside during October, but we expect Hurricane Sandy to take around 0.5% off US GDP in the fourth quarter of 2012. “Despite the widespread devastation, a positive impact on GDP growth due to reconstruction effects may be witnessed in the upcoming quarters. “The underlying trends heading into the fiscal cliff may be difficult to assess because of the data impact of Hurricane Sandy, but even with a full extension of the Bush tax cuts, US growth faces headwinds into 2013.“Euro zone: Despite European Central Bank measures, the euro zone remains a key potential risk to our ‘muddle through’ outlook. Spain appears reluctant to request a bailout, although we still believe the request will be made in the next few weeks. “This will allow the ECB to activate Outright Monetary Transactions and markets will have greater clarity as to how the conditionality arrangements will pan out.“UK: We expect the UK economy to contract by 0.3% in the fourth quarter of 2012 followed by modest gains in 2013.“Encouragingly, labour market data has been surprisingly strong in the UK. This is attributed to the flexibility of workers filling the vacancies, in terms of both geographical movements required and accepting flexible employee/employer contracts.“Emerging markets: Growth appears to have bottomed out and we expect markets to recover further as earlier policy easing measures feed through. Indeed, we have increased our China growth forecast ahead of consensus and expect emerging markets growth overall to decouple from developed markets. This is due to both stronger domestic demand and stronger intra emerging market trade links.” Tue, 20 Nov 2012 15:41:55 +0100 France stripped of AAA rating France was stripped of its gold-standard AAA credit rating last night after credit rating agency Moody's suggested its growth prospects would be hit by a lack of competitiveness and an inflexible labour market.Moody's also warned that France’s ability to absorb shocks created by the ongoing eurozone crisis was becoming less predictable and said its exposure to riskier eurozone countries including Spain and Greece was disproportionately high.The ratings agency said: “Further shocks to sovereign and bank credit markets would further undermine financial and economic stability in France as well as in other euro area countries.“The impact of such shocks would be expected to be felt disproportionately by more highly indebted governments such as France.”Moody’s is the second ratings agency to downgrade France after Standard and Poor’s lowered the country’s rating earlier this year. Ratings downgrades have had little effect on the borrowing costs or sovereign bond yields for countries such as USA and Pierre Moscovici, France's finance minister, implied he was not worried yields would rise."Moodys is now giving France the same rating as Standard & Poor's, which has allowed us to live with low interest rates for many months," he said.But Stephanie Kretz, from the investment strategy team for private banking at Lombard Odier, said the current “French bashing” as France’s economic and finance minister Pierre Moscovici termed it might not be “absurd and unfounded”.She said: “Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones and, unfortunately, the French budget takes the latter approach. “We doubt that the French approach, which lacks growth-oriented structural reforms and concentrates on higher direct taxes rather than indirect taxes or spending control, will achieve its deficit reduction goal.” And Kretz added: “Given France’s gross debt-to-GDP ratio of 105.5% and unconvincing budget, any loss of confidence could be the trigger for a rapid rise in yields.” Tue, 20 Nov 2012 15:34:44 +0100 Inflation: Götterdämmerung or Gangnam Style? By Robert Farago, head of asset allocation, SchrodersWho would have predicted that a chubby Korean singer in his mid-thirties would top the UK chart, singing in his own language? Psy’s Gangnam Style must be the first chart-topper whose success can be so clearly attributed to the power of the internet. The combination of a catchy tune and a distinctive dance routine has seen his video attract over 600,000,000 viewings on YouTube. You too will need to study Psy performing his horse-riding moves or risk looking out of touch when you hit the dance floor at the office Christmas party.It also seems inevitable that the ever more aggressive inflationary policies of the major central banks will eventually trigger a bout of inflation. The question investors face in the internet age is: will inflation pervade market psyche as quickly as a Korean pop sensation? Will holders of US dollars, sterling and yen wake up and discover together that the emperor has no clothes; that all the unconventional measures taken by central banks cannot hide the fact that governments do not have a way to pay back their debt and are following the well worn path of debasing their currencies? This could trigger chaos as investors empty their bank account and pile into gold and other real assets. Or will price rises unfold gradually like Wagner’s classic ring cycle of four operas, ebbing and flowing, before climaxing with the six and a half hour epic, Götterdämmerung? History provides examples that can help our understanding.World War II left a number of countries saddled with record levels of debt relative to the size of their economy. What happened next depended in large part on which side you were on. Hungary, which was an Axis power, holds the record for the worst ever bout of hyperinflation, which peaked in 1946 with prices doubling at a rate of more than once a day. This marked the end of the Kingdom of Hungary.Japan avoided hyperinflation but this provided little comfort to bond holders. Japanese inflation soared in 1946 to over 500% before returning to single digits in 1952 with the debt burden substantially reduced in real terms.US inflation spiked too, reaching 20% in 1947 and 9% in 1951, but never became a widespread concern since memories of the Great Depression meant people continued to fear deflation. Price rises averaged just 2% over the next twenty years before the oil crisis hit and sent prices soaring in the 1970s. Debt to GDP in the US was gradually reduced over 35 years through a combination of these two inflation spikes, strong economic growth and financial repression through regulatory constraints, including limits on nominal interest rates.But in all three examples the end of the war provided a critical juncture that played a significant role in signalling an inflationary outcome. In contrast, the Israeli inflation era of the 1970s and 80s is perhaps more typical, in that there was no single trigger. Instead price rises gradually infected the economy. Inflation was below 4% at the start of 1970 but was above 10% by the end of the year. However, it then stabilised around this level until 1973, when it ramped up to over 20%, exceeded 50% in 1974, and then moved between 20% and 56% until 1979, when it rose again to over 100%. Even this was not enough to signal the end. A culture of inflation had become embedded in the economy and price indexation was widespread. This allowed the economy to function, even with prices doubling every year. It was not until 1984 that prices spiralled out of control, sending inflation to its peak of 486%. An economic stabilisation policy was enacted in 1985 and inflation fell to 19% the following year, marking the end of an era.For now, consumer price indices in Europe and the United States are rising broadly in line with central bank targets, while Japan continues to suffer deflation. Inflation is expected to ease next year in many countries. High levels of unemployment are keeping a lid on wage pressures. The slow recovery from the economic downturn of 2008-9 means there is spare capacity in the manufacturing sector, putting a lid on goods prices too. The removal of government subsidies is the most obvious inflationary force for now, with the tripling of university fees in the UK pushing consumer price inflation above expectations in October.In contrast to broad measures of consumer prices, markets dominated by the super wealthy are seeing new records set on a regular basis. A London home overlooking Hyde Park is currently on the market for £300m. A Gerhard Richter abstract was sold for U$34m, a new record for a living artist. Gold has also become a favourite market for private clients looking with a distrust of fiat currencies. The price remains below its 2011 high in dollar terms but has hit new highs in a number of other currencies including Indian rupee, a key market for bullion.The boom in commodity prices over the last decade means there are plenty of new oil barons and metal moguls hitting the headlines, but the agricultural world is clearly benefitting too. October saw Marchup Midge become the world’s most expensive sheepdog, the eighteen month year old fetching £8,400 at an auction in Skipton, North Yorkshire.Successful debt reduction The International Monetary Fund studied the history of debt reduction episodes across different times and countries in its latest quarterly. Loose monetary policy was a consistent theme of successful episodes and it is safe to assume that central bank interest rates will remain low for the foreseeable future.Structural reform was also a key ingredient. This is a concern since, as highlighted above, the split US administration is not expected to make any substantial progress towards a sustainable solution over the next two years while the euro area is in the midst of an existential crisis.Economic growth is another ingredient in reducing debt to GDP, yet the outlook is challenging for at least four reasons.First, growth is typically slower in the decade after a financial crisis. Second, the developed world will not be able to follow the traditional route of devaluation to boost export growth since you cannot have all countries devaluing against each other. Third, while debt levels have reached post-war levels, the economy is not faced with the post-war need for reconstruction. Fourth, aging populations will also make rapid economic expansion more unlikely.The IMF argues that the risks of inflation are lower since central banks have adopted inflation targeting. However, the US Federal Reserve also targets unemployment and its recent missives have made it clear that restoring jobs will take priority. In addition, quantitative easing adds controlling asset prices to the list of central bank policy aims. Controlling consumer prices, asset prices and unemployment levels will prove to be an impossible trilemma. We expect that keeping prices low will fall to the bottom of the priority list, not least because a dose of unexpected inflation would be handy for the heavily indebted government.This analysis leads to a somewhat unsatisfactory conclusion. It seems clear that inflation will pick up at some point. However, it is not clear (a) by how much, (b) when it will happen, or even (c) if we will suffer another bout of deflationary fears first. This latter risk would increase dramatically if China suffered a hard landing, since they have been the prime driver of commodity prices over recent years.In terms of government policy, we expect any rise in bond yields to be met by an increase in financial repression, with regulations introduced to force banks, pension funds and insurers to hold more government paper. Capital controls cannot be ruled out and this was a notable area of discussion at the recent Jackson Hole gathering of central bankers. Still, it is dangerous to assume that all this means any rise in bond yields will be orderly. The financial system is inherently unstable and authorities will not be able to control all prices.Could we be exaggerating the threat? It has been said that having a little inflation is like being a little pregnant. Once it arrives, there will be no denying it. However, the post-war experience in the US tells us that even high levels of inflation do not necessarily stoke inflationary fears. Still, back then investors were worried about a repeat of the great depression while the population today is more attuned to fears of rising prices.And there is another dimension. Like pregnancy, inflation can come as a surprise or prove to be a false alarm. Lance Bombardier Lynette Pearce was fighting the Taliban in Afghanistan when she complained of stomach pains before medical staff at Camp Bastion informed her she was having a baby. In contrast, back in 1557 Queen Mary I’s swelling belly led the nation to anticipate a new heir to the throne. But this proved to be a false alarm. Instead, it turns out that she was suffering from uterine cancer and died soon after. The parallel for investors is that the lack of inflationary pressures to date should not be seen as a sign of health. The underlying problem that leads us to fear inflation is excessive government borrowing and this is set to grow as the population ages. It is only when governments introduce dramatic welfare state reforms that the situation will improve. We continue to fear that it will take a crisis in the form of rising bond yields before governments are forced into action.So what should investors do?In conclusion, the risks of inflation are clear. This does not mean that 2013 will be the year in which bond markets riot. But we are confident that portfolios should include protection against rising prices. The impact on asset prices if inflation returns is much clearer. It will be disastrous for holders of cash and bonds, who are not even compensated for current levels of price increases. For equity investors, inflation puts downward pressure on valuations, with 4% historically proving to be an important threshold. A global pickup in inflation would hit emerging markets first since many are already suffering high levels of price rises already. The traditional beneficiaries of higher inflation within equity markets are energy companies and miners of both precious and industrial metals. The Japanese market would also benefit since that economy has been held back by two decades of price declines and domestic investors would be forced to flee from excessively high bond weightings in their investment portfolios.And for once we are hoping that it is the fat lady doing the singing and not the chubby Korean. Mon, 19 Nov 2012 12:44:56 +0100 Barclays offers weekly investment outlook Kevin Gardiner, head of investment strategy EMEA at Barclays, gives his expert outlook for the week.Overview: Meanwhile, back at the ranch...•  Stocks have fallen but little else has changed after the US election•  Compromise on the 'fiscal cliff' is still likely •  The European Central Bank remains a credible backstop for the euro area•  Use likely volatility to add to long-term positions in risk assetsEquities• “The UK doesn’t make anything!”… •  …is an inaccurate view •  Rolls Royce is a high quality manufacturer and a core portfolio holdingFixed income•  Key stakeholders recognise that targets for Greek debt are ambitious… •  … and some official sector involvement is needed•  Higher and firmer trend for UK inflation; Quantitative Easing on pauseCommodities•  Grain and soybean prices have remained relatively range-bound•  Further consolidation is likely in the short term…•  … but risks are still skewed to the upside, particularly for corn and wheatForeign exchange•  The Bank of England Inflation Report forecasts higher inflation and weaker growth … •  … two fundamental factors that do not bode well for sterling•  We see any Japanese Yen strength as an opportunity to sell the currency Mon, 19 Nov 2012 12:34:26 +0100 Nationwide offers new international accounts Nationwide International, the offshore subsidiary of Nationwide Building Society, has launched new Bonus Access, Bonus 1+ and Bonus 95 accounts.The rates of annual interest on the new accounts are:•  Bonus Access account (Issue 3) paying up to 2.10% gross p.a./AER•  Bonus 1+ account (Issue 2)  paying up to 2.30% gross p.a./AER•  Bonus 95 account (Issue 2) paying up to 2.40% gross p.a./AERCustomers can invest between £5,000 and £5m into the accounts and monthly interest options are available on all the above accounts.  Philip Dunne, managing director of Nationwide International, said: “Nationwide International continues to offer some of the highest rates of interest in the offshore market and these latest issues of our Bonus accounts are no exception.“Offshore savers looking to maintain easy-access to their money are being offered a highly competitive rate of up to 2.10% on Bonus Access. If savers can give 95 days’ notice to make a withdrawal, then Bonus 95 pays a market-leading 2.40%.“Nationwide International has a wide range of accounts to suit different customer needs and continues to be one of the most popular providers amongst offshore savers.” Mon, 19 Nov 2012 12:22:14 +0100