Let’s start with inflation. Where do you think it’s headed in 2021?
Olly: We do think there will be a bit of inflation next year, certainly more than we have seen recently, but we're still only talking about, let’s say, 3% – which a few years ago would have felt quite normal. The government has a lot of debt and inflation is an easy way of reducing that without having to do anything radical. On top of that I think there will be a lot of pent-up demand in the system from people who have stayed at home and not been spending in 2020.
What does that mean for investors?
Olly: This will probably just change the sectors that do well over the next year. Some of the areas that have been out of favour in this low-inflation environment of the last few years might come back and do better. Financials have been pretty unloved for a while now and we might see investors tilt back that way. Banking stocks, for example, are offering value – the price you’re paying for them is low compared to what you’re getting. That’s also the case for energy companies.
Interest rates are at rock bottom right now. Are they going up as well next year?
Olly: They could follow inflation up a little bit in the future, but for the short term I think they will stay where they are. If they do go up in 2021, we’re talking about a rise of a quarter of a percentage point. It’s very hard to see a scenario where we get back to people getting what they think is a reasonable return on cash. If you're a long-term investor, holding money in the bank is probably not the way to go – you need to find something else to do with it.
Where should people with cash holdings be looking then?
Olly: This depends completely on your timeframe. If you need that money back in the next two or three years – as a house deposit, say – you probably have to accept you’re not going to get great returns on it. You need to keep it safe, because the worst thing you could do is put it in the market and find you lose 20% and have to change your plans.
If you’re a long-term investor – say this is your retirement savings or pension – and it’s something that’s going to be in the market for ten years or more, equities are the way to go. You probably want a nice, diversified basket with stocks from different sectors and different geographies. In the long term, equities should pay off well above safer options, but it really is all about that timeframe.
What do you think is likely to happen to tax next year?
Olly: Obviously the government has taken on a lot of debt and is now trying to find ways to pay it back. There’s a lot in the press about how they are going to do it: whether that's a wealth tax, increased capital gains tax or a change in inheritance tax. I think we will certainly get some tweaks in the system because no one is going to hold the government to its manifesto promises about not increasing certain taxes – because no one saw us being where we are today.
As a company we’re quite sceptical about the introduction of an overall wealth tax. The world is trending away from wealth taxes and I suspect it’s just really hard to implement. Most of the country’s wealth is in pensions and property, so it’s tied up which means it’s not the easiest thing to pay tax on. It’s also hard to work out what people actually own: if you’ve got an expensive painting on your living room wall, I’m not sure how HMRC tracks that down, especially given it’s understaffed. It’s much easier to tinker with existing taxes, so I suspect capital gains tax will probably go up a little bit and the government will look at exemptions and loopholes around inheritance tax.
Is the government going to continue to spend in 2021?
Olly: Well, we're not out of the woods by any stretch and I think there’s a new normal that makes it more acceptable for the government to spend. There’s certainly no appetite for austerity anymore – I think a lot of us look at that and think it was talked about as a big saving on expenditure, but somehow it didn't balance the books and a lot of people were put in some very hard places because of it. So it might be that we maintain higher levels of debt for quite a while, but it won’t just be us in the UK. I suspect everyone everywhere is going to have to spend to make things work.
What does this mean for private investors?
Olly: The main issue is the underlying worry about how the debt is repaid. Will it bring higher taxes or something else down the line? In practice, though, it’s the same for governments as it is for individuals: borrowing money doesn’t cost huge amounts in percentage terms these days because of where interest rates are, so I don’t think we have to be terrified of debt in the way we used to be, but we probably do have to accept that spending is necessary at the moment.
Simon: There’s no realistic debt reduction strategy even in the architecture at the moment. These things are cyclical and take a long time, so we're going to have to get used to the model of having very, very substantial government debt. While interest rates are low, they can get away with it and so long as governments borrow in their own currency they will be fine. At some point there must be upward pressure on interest rates and inflation, so people will want to protect themselves against losing out through investments that shrink in real terms. But that’s going to be hard to do in the coming year without taking some big risks because you can’t do the historical low-risk things like sticking your money in a building society or buying government debt without probably making a small real loss on your investment. If people want to protect the real purchasing power of their savings, they are going to have to accept more risk.
Which investment sectors are you most excited about for 2021?
Olly: In the UK, I think the stuff with potential to go up in 2021 is the really boring stuff. I just spoke to our head of fund research and he mentioned WH Smith. It's a perfectly good business offering really good value and investors have ignored it all year.
I also think emerging markets are a good place to be investing in the next few years. China, for example, has a strong long-term story. It has a new middle-class that’s growing and growing, and it reinforces the economy there. Like with the American middle-class buying American-made goods, the Chinese middle-class uses Chinese goods and services, so the whole market is growing very fast: it consumes what it produces to feed back into itself.
Simon: I'm most excited about tech, particularly some of the medical tech, and fintech like payments technology. There are still lots of things coming down the pipeline that are just as transformative and incredibly exciting. However, you have to be careful of the emperor’s new clothes!
There are some massive overvaluations out there. Some of them get called out in time – like WeWork – but some of them don’t. Look at DoorDash or Airbnb. Airbnb has been valued at more than the aggregate value of the top three hotel chains, which have got assets and brands and everything else on their side. This doesn’t mean Airbnb isn’t a great company or isn’t a serious disruptor; it just means at some point the music will stop and people will ask what this valuation is actually based on. My big fear is we could get the year 2000 all over again, with inflated valuations of tech companies coming crashing down. So if I was an uninformed personal investor right now, I wouldn’t be taking punts on big tech or small tech. They are exciting and you could make a lot of money, but the majority of them will probably not yield positive returns over any decent period of time.
Where do you think the responsible investing trend is headed?
Olly: This is now a huge area for us and we’re really excited about it. Our research this year found two-thirds of high net worth individuals agree that environmental, social and corporate governance (ESG) products should be part of their investment portfolio. It’s something we’ve done on the fringes for years for individual clients who’ve requested it. This year we’ve put it on an equal footing with the portfolios we’ve always done so it’s part of the discussion with every client. The thinking used to be that you give up some of your returns in order to do a bit of good. But ESG is now the direction of travel for investors, for companies, for everyone, so I think you can now invest with an ESG mandate and, over the long term, expect it to perform as well as any unconstrained portfolio.
Is now a good time to be investing in property?
Olly: Do I think capital values of property are going to keep shooting up forever? At least for the shorter term, my inclination is no, but we've all said that before and we've said it before a number of times. One thing that’s more certain is the tax regime and I don't think it's that favourable for buy-to-let property over other forms of investment right now. You've got a bit more stamp duty now; you can't offset the cost of your mortgage fully in the same way you could a few years ago; and you're paying income tax rates on all the rent that comes in. In London, in particular, rents have not been going up with property prices, so your yield is not what it was. Compare all of that to a portfolio of equities, a lot of which is taxed at 20% in the current capital gains regime. If you’re looking to make good money on property now, you’re relying on those capital values going up – and I wouldn’t like to predict whether they will or not. All that said, if you have a lot of other investments and want to do something different, there’s nothing wrong with a bit of property to diversify your portfolio. I just wouldn’t go all in on property as people have done in the past.
Simon: I would also differentiate between property you live in and property you invest in. As a cultural thing, I think people overthink where property prices are going to go in terms of their own flat or house. Over decent periods of time, rent can be dead money, so if you can possibly save up or get hold of a mortgage – right now, interest rates are low and some higher loan-to-value mortgages are coming back – my view is that it’s always a good thing to own your home. But what would I do with spare cash? I agree with Olly.
Brexit then… A deal is still TBC, but is there anything you can say about the impact of our departure on investors?
Simon: What we don’t know yet is whether UK investors will be able to access international products with the same regulatory protection. I’m pretty sure it’s going to bring inflationary pressure. One benefit could be that currency becomes quite important. Sterling may weaken if we don’t get what’s perceived as a good deal. That would make UK asset values look cheap and therefore there will be buying pressure that will at least be a positive for existing investors.
Olly: The key thing right now is diversification. If you’ve got a good spread of your investments across the UK and beyond, you should be able to weather the uncertainty. I wouldn't be too nervous unless you are very concentrated in one spot.
Finally, how should long-term savers be approaching 2021?
Olly: I’m quite happy to be holding equities for the next few years. Again, you want to be diversified, you want to do your research and make sure you’re in the right places. You’ll see ups and downs but, if you don’t need your money back, it’s just about being someone who can handle the volatility emotionally. If the market drops, and you panic and sell, you shouldn’t have been in there at all.
Simon: The crucial point is there will be volatility. There always has been and we're in a period now where guessing a single right answer on an individual investment is incredibly difficult. That means the two golden rules are: diversification; and only invest what you don't need over the short term.
I also have a personal view that it's fantastic if you can find an asset class that will have an alternative use. For example, if you can persuade yourself you know about books or photographic prints or wine or old cars, they can be surprisingly attractive. That sounds like a very privileged conversation but I’m not talking about Ferraris and big-name artists; cheaper cars and little-known artists and photographers can also be very rewarding. They can be volatile as well, but at least you can read them, look at them, drive them, enjoy them – and maybe even drink them.
For more about Saunderson House, head to SaundersonHouse.co.uk.
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