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It’s certainly a bad principle for governments to direct what any investors should or shouldn’t do with their savings, but maybe in practice it makes sense to retain more of those savings in Britain and accordingly give a spur to growth.
Red tape has slowed down returns
One is the additional tax on dividends imposed by Gordon Brown when he became chancellor in 1997. Another was the fact that the US generated faster economic growth, and its tech companies came to dominate global share markets.
So is this good or bad for investors? First of all, let’s look at the question of equities versus fixed-interest securities. Over any long period – and pension investments are for up to 40 years – equities do produce higher returns, but they are more volatile. So yes, provided pension funds allow for that volatility, it’s probably in the interest of their customers that they should reverse at least part of that seismic shift away from shares.
But if you allow for the higher dividends here, while there is still a gap, it is not nearly so large. If you look at the total return, UK investors got more from dividends and less from capital growth, whereas in the US it was the other way round.
So rationally, you have to have a fair chunk of your investments in America. It’s quite possible, of course, that in the next few years markets that offer better value, including the UK, will produce higher returns. There’s an argument too that since British pensions will have to be paid out in pounds, it’s a good idea to have significant investments in sterling-denominated assets. So some rebalancing towards the UK probably does make sense. A radical shift would not.
Reeves’s revolution looks underwhelming
The trouble is that this is not much. That figure is spread over five years, so £10bn a year. And while it is directed to a wide variety of investments, including infrastructure, property and private equity, not just to shares, you have to set that number against an economy of more than £2.5trn.
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Let’s not blow too much of a raspberry at this new agreement. For a start, it will probably do no harm. Pushing pension funds to try to invest for the wider good of the economy, rather than sticking funds into gilts, must be right both for their savers – the people to whom they have fiduciary responsibility – and for the country as a whole.
Need to know
Actually, I think anything that encourages equity investment – be it through pension funds, investment trusts, or directly – deserves a welcome. There are three reasons for that.
And third, I think there is a real danger of bond market and/or currency turmoil in the coming months, and if I am proved right, global equities are probably a safer haven than anywhere else.
There is the trade war, of course. It’s a bit unfashionable to say so, but I’m reasonably comfortable that the big players will see sense. Trade will be more restricted in many areas but it will open up in others. I don’t like the way this is being conducted, and decent people and solid enterprises all over the world are suffering unnecessary damage. But we may end up with a better-functioning system than we had before – one run by the big trading nations, with a clamp-down on the rampant cheating that has undermined the present World Trade Organisation-led trade establishment.
Now, however, deficits and debt are rising and governments seem unfazed by that. The deficit is rising here, but the UK does not matter in global terms. The US is running a federal deficit of 6 per cent of GDP, and that is rising too – which absolutely does matter to the world.
So I come back to equities as the best investment. They have after all performed well, over the long term, for more than a century. But we should certainly be aware there will be bumpy times ahead.
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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