December 20, 2013 5:44 pm
2014: the year the world got back to normal?
The outlook for savers, borrowers and investors for 2014 is largely about figuring out where the interest rate – the puck – is heading, and how fast.
Bank of England governor Mark Carney – like Gretzky, a Canadian and a fan of ice hockey – attempted to show where the puck might be going earlier this year by instituting the policy known as “forward guidance”, which links future increases in rates to specific economic conditions such as employment levels. However, the policy has suffered a fate that would be familiar to many Canadians: it has been overshadowed by events in the US.
The end of extraordinary monetary policy doesn’t mean interest rates are about to rise. Of the 22 City institutions polled regularly by the Treasury, just two – Santander and Bank of America – think that the Bank of England’s base rate will rise to 0.75 per cent by the end of 2014.
But markets have already started to price in the impact of dearer money. A year ago, (UK commercial bank liability spot curve) five-year (what) stood at 1.03 per cent – this week it was 1.86 per cent. The yield on 10-year government bonds or gilts has risen to 3.09 per cent now, from 1.88 per cent a year ago.
Savings
Savers have been the most obvious victims of ultra-low interest rates, and this year has been one of the worst on record for cash savers, writes Elaine Moore. Higher-rate taxpayers currently need to find returns of at least 3.5 per cent to keep pace with inflation, but even the best five-year fixed account, from Shawbrook Bank, pays just 3.2 per cent.
Other nuggets of good news: the limit for cash Isas will rise to £5,940 in April, and National Savings & Investments has been provided with a higher funding target, which means that the state-backed savings institutions is less likely to continue cutting rates and withdrawing popular accounts.
One savings trend unlikely to end is the growing consumer appetite for alternative investments. Crowdfunding websites in the UK attracted nearly £1bn in 2013 and next year the sector will be regulated by the Financial Conduct Authority. Some analysts say formal regulation will be the mechanism that finally propels crowdfunding into the mainstream.
Mortgages
The flip side of higher savings rates is higher mortgage rates. But while borrowing costs might rise, the variety and size of mortgages available looks set to improve as the housing market continues to gather momentum, writes Thomas Hale.
The conclusion of the residential part of the Funding for Lending Scheme means that certain residential lenders will, from January, no longer have access to cheap government funding.
A rejuvenated residential housing market is now providing increasingly competitive rates. Thanks in part to funding for lending, lenders have started to offer a wide range of large mortgages – which require larger deposits and are less risky. Competition has helped to drive down rates, with rates of less than 2 per cent available on a number of seven-figure loans.
Despite this, many have predicted that the end of the Funding for Lending Scheme will trigger a rise in rates in 2014, and that current offerings are “as good as it gets”.
“In terms of our clients, we are seeing a very high take-up on five-year plus fixed rates,” he said.
The prospect of higher rates has spurred remortgaging. Mr Gammon added that although remortgaging has typically made up about 20 per cent of Knight Frank Finance’s business over the past five years, it has represented about 50 per cent over the past nine months.
However, just as Funding for Lending ends, the second phase of Help to Buy will start in earnest. Several more lenders are expected join, helping to make the market for 95 per cent loan-to-value (LTV) mortgages more competitive. Rising house prices will encourage more high-LTV lending outside Help to Buy; Yorkshire Building Society recently undercut Help to Buy lenders with its own 95 per cent mortgages.
Investments
The prospect of dearer money, coupled with the gradual withdrawal of monetary stimulus in the US, means investors should approach 2014 with some caution, writes Lucy Warwick-Ching.
Fund managers are also voicing concerns that the reining in of quantitative easing will weigh heavily on investor sentiment in the UK and across the pond.
But QE tapering hasn’t damped the mood for some. Research from Redmayne-Bentley’s internal broker survey revealed that 86 per cent of its brokers expect the FTSE 100 to break through the 7,000-point barrier and continue to climb in 2014.
There is also a degree of unanimity among fund managers regarding the outlook for investment next year. Most believe the economic recovery in developed nations, continuing low interest rates and the rotation away from bonds would all help prolong the current bull market in shares, which will also benefit from above-average economic growth in the US and stabilisation in the eurozone and China.
There is more debate about valuations, which some feel have become stretched in the US especially. Emerging market shares are cheaper, which some feel makes them compelling. “While 2013 was the year to own developed world equities and avoid everything in the emerging world next year we think it could be the year of the Asian equity; a continuation of Japan’s stock market renaissance and return to favour in ‘emerging’ Asian equities,” says Tom Becket at PSigma.
Closer to home, managers believe UK small-cap equities – which have been rampant since 2009 – could continue to perform well. “The universe provides exposure to faster-growth companies, where there is a greater prospect of mergers and acquisitions,” says Jonathan Jackson, head of equities at stockbroker Killik. “Further attractions include the strong IPO pipeline and the ability to invest Aim shares within an Isa.”
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Pensions
Rising market interest rates are good news for those approaching retirement, since gilt yields form the basis for annuity rates and drawdown limits. But more importantly, the winds of structural change will continue to blow through the retirement market in 2014, writes Josephine Cumbo, as policy makers switch focus to improving outcomes for millions beginning to save for workplace pensions.
Having laid the foundations for automatic enrolment, which has seen 2.2m signed into company pensions in the past 15 months, the government will now push to raise standards in the schemes widely used by these new savers.
“Improving member outcomes is at the heart of many recent consultations and studies on Defined Contribution schemes,” says Zoë Lynch, a partner at Sackers, the legal firm.
“We are expecting further news on capping charges, governance, default funds and the planned audit of legacy schemes following the Office of Fair Trading’s market study published in September 2013.”
As AE rolls out to tens of thousands of medium-sized employers this year, the government is expected to introduce a charge cap to protect these new savers, of between 0.75 and 1 per cent.
“The government is united on the need to act quickly to protect consumers,” says the Department for Work and Pensions.
“We will be publishing our response to the consultation in due course. This is an important and complex consultation which requires our proper consideration to ensure we get it right.”
The government will also face further pressure to intervene in the £12bn-a-year annuity market, beset by accusations of profiteering. Any action will be guided by the findings of a 12-month thematic review of the annuity market by the Financial Conduct Authority, due in February.
Both legislators and regulators will also be urged to take stronger action to tackle pensions liberation fraud, where savers are being misled into believing they can take cash from their funds before age 55, without tax consequences.
“If HM Revenue & Customs and The Pensions Regulator do not respond with rigour to the systemic problems in the current framework then there is the real potential for the problem to get worse in 2014, not better,” said Margaret Snowdon director with JLT Employee Benefits.
“Action can be taken to protect pensions against the reduction in the allowance, but this action needs to be taken before April 6 2014,” said Andy James, head of retirement planning at Towry, the wealth managers.
Regulation
The UK got not one but two new financial regulators during 2013, writes Jonathan Eley. The old Financial Services Authority was disbanded and in its place came the Financial Conduct Authority and the Prudential Regulatory Authority.
The FCA had a busy year and 2014 will see even more activity. For the FCA, the biggest change will come in April when it takes over the regulation of consumer credit from the Office of Fair Trading.
This will add anything up to 45,000 more companies to the 27,000 it already supervises. Its likely stance on “payday lenders” has attracted the most attention, but consumer credit also includes credit cards, scorecards, personal loans and other forms of unsecured credit.
Next year will also see the results of probes into the annuity market (early February), the cash savings market, price comparison websites and “add-on” insurance such as travel insurance, breakdown cover and legal protection. Two major pieces of financial regulation will come into force in 2014. One is the
mortgage market review, which takes effect from April. The same month sees the start of what some have dubbed “RDR 2” – a general ban (but with some exceptions) on commission payments from financial product providers to execution-only distribution platforms.
Many smaller distributors, including the Share Centre, Alliance Trust and Charles Stanley Direct, have already switched to “clean” fund classes – ones that do not pay commission to any intermediary – ahead of this deadline, and introduced separate charges for their own services. But two of the largest players, Hargreaves Lansdown and Fidelity, have yet to announce their full pricing structures for the new regime. They are likely to do so early in the new year.
What does the fox say?
No, not the surprise YouTube hit from Norwegian duo Ylvis – but the more serious matter of FTSE100 predictions made by the semi-tame foxes that frequent former FT Money columnist Kevin Goldstein-Jackson’s back garden.
He writes: The canines have a past forecasting record that stands up to the City’s best. Predictions are made by laying out identically sized pieces of sliced chicken, marked from –15 per cent to 15 per cent. The foxes gobble all the chicken, but the first piece taken is deemed to be the prediction.
Last year, the fox ate the 2 per cent slice first, then the 3 per cent one in quick succession – so it may have been indicating 23 per cent since this was the easiest way to indicate a figure not actually in the line. The FTSE was up 10.2 per cent year-to-date at the time of writing. To avoid any such doubt this year, I extended the potential range of outcomes by adding more chicken. The pieces ranged from 25 per cent to minus 25 per cent.
A small young fox sat watching from a safe distance while the chicken pieces were laid in line and the competition rules were explained. Once I’d gone back indoors, it ate the minus 17 per cent piece first. So that’s the prediction for 2014.
Copyright The Financial Times Limited 2013.
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