What Future for the UK?

Yesterday I was able to go to a CCLA (Churches, Charities and Local Authorities) Investment Seminar as our Diocesan Secretary and a member of the Diocesan Resources Board were unable to go and kindly passed the invitation onto me.

As the name suggests the CCLA invests funds on behalf of a wide variety of trustees of charitable and similar bodies.  The seminar was intended to help trustees to better understand the variety of options available to them in the current complex economic environment.  It was an interesting insight for me to look at stock market, bond market and other investment areas in contrast to my more normal habitat of thinking about the effects of the policies of various organisations on their employees or about the policies that might influence economic growth and regeneration in the county and region where I work.

I was particularly struck by the views expressed about the UK as a place to invest, which I will come to later, but it was also interesting to see how the investment policies of charitable trustees might differ from many of those who influence the way our investment markets work.  Although charities might need to hold money for relatively short periods to bring forward for a particular project, in many cases they are there for the long haul.  Because of this, they are more interested in a reliable income stream, and fluctuations in the capital value of assets is less important as they are unlikely to want, or in many cases to be able, to crystallise the asset.  I think, for example of our Diocesan Resources Board, where the contribution of investments to the total income of the diocese needs to be regular and reliable to enable the work of the diocese (including the payment of clergy) to be funded.  (I have no role in decisions in this area but I imagine this to be the case).  This means a longer view, with enough growth to counter inflation, but where income is important, will be very different to many investors where capital appreciation is the main objective.  It flies contrary to all those executive remuneration policies where big bonuses are payable for ‘enhancing shareholder value’.

However, the thing I most want to focus on is what was said about where one might want to invest.  In the current environment it seems that equities (shares) are seen as potentially offering good returns with, in many cases good dividends for income and sufficient capital growth to offer a long-term defence against inflation.  The really interesting question, though, is in which shares, or more precisely where, one might want to invest.  To quote from one of the PowerPoint slides: ‘Income is growing faster outside the UK’.  It then showed regional dividend yields and growth rates:

                                                Current Yield                      Annualised 5 year dividend growth

                                                                %                                                            %

UK                                                          3.2                                                          -1.2

US                                                          1.9                                                          1.6

Europe                                                 3.5                                                          1.0

Japan                                                    2.3                                                          4.4

Asia Pacific (ex Japan)                  2.8                                                          7.7

What this shows is a reflection of the forecast economic growth rates for various parts of the globe, for example by 2016, with the Euro area at 1.7%, UK2.7%, US 3.4%, Central/Eastern Europe and Latin America 3.9%, Middle East and North Africa, and Sub-Saharan Africa 5.1%, and developing Asia (including China and India) 8.6%.

The conclusion in choosing your investment fund is that the developed world, including the UK is not a good prospect.  One might wish to choose a global equity income fund (though interestingly, CCLA’s fund still has about 60% of its assets allocated in the UK, Europe and North America).  However, the key point is that one should look at where the profits are made, not where the company is based.  The company might, therefore, be listed on the London Stock Exchange but the key question is how much of its profits are made in those places that are growing quickly – which are not UK, Europe or North America.

Now, of course, it is one thing to analyse this dispassionately when choosing where to invest for the best return.  It is another question when the implication (or more) is that there is not going to be much growth for us here in this country.  That raises some serious questions when we talk about economic development, regeneration and jobs here in Worcestershire and in the rest of the UK. Especially when one reckons that outside London and the South-east, which have continued to grow economically in recent times, that effectively means the rest of us have been enduring our own local recession – the more so for those declining parts of the Midlands and the North.

We were told that when one takes into account currency movements that will reflect the declining economic strength of the developed world and the growing strength of the rest, we will see relative declines in our standards of living.  I guess the question then is does a relative decline matter, if in absolute terms we are still pretty well off?  Within that, though, there is a distribution question, for, as we know, when there is pressure on living standards people feel it much more keenly that when there is growth.

We can crunch the numbers (and it is important that we do) but what does this mean for real people who are affected by these changes?  We rejoice for those in parts of the world where they may be moving out of poverty (if the rewards are properly shared) but what kind of reappraisal of priorities might this suggest for those who may be affected in the reverse direction?