Alan Higgins in Conversation.
Our guest this month was Alan Higgins, Chief Investment Officer at RBS Coutts Bank. The previous morning had seen him on Radio 4’s Today programme and we were all keen to hear Alan share his insights on the currently state of the economy with us in person.
Alan introduced himself as an economist who invests his own money alongside that of the bank’s clients. It obviously indicates to clients that he believes in the investment recommendations he is making. He’s not always so keen to call himself an economist, however: he told the story of being among a group of economists asked by the Queen why none of them had been able to foresee the coming crash of 2008. He responded by telling her he was an investment manager rather than an economist.
Alan structured his talk by grouping a series of remarks around some of the areas he is most often asked to discuss. What follows is merely a flavour of the topics covered. You can hear Alan speak in greater depth about some of them in the video interview he gave after the talk which is featured below.
Inflation & QE.
Despite a large amount of quantitive easing, there has been no sign of inflation. Printing money after 2008 didn’t cause inflation, which is actually not a surprise. Alan believes inflation is led by a credit boom and there is currently little bank lending to support any such boom. On the back of this, UK interest rates will remain low for a long time to come. Indeed, Bank of England Governor Carney appears to suggest that the long-term outlook will not see a return to a more traditional 4% – 6% but something closer to 2.25%. In the US, however, Alan suggested that the Fed are likely to raise rates moderately in December but any rise in the UK will follow later. Rises in the future will continue to be slow and gradual.
On the whole Alan is bullish on the economy and he expects a big manufacturing rebound on the back of increased consumption and low commodity prices. Although the US rate rise will cause a slight dip in the market on the day, he predicts a huge subsequent rally.
In the case of the European Central Bank, he thinks it will continue with what he terms its ‘Zimbabwe’ policy of more quantitive easing. This will also entail further rate cuts.
Coutts & Investments.
Coutts are currently underweight on US equities but this is mainly because equities in general are relatively expensive at the moment. The best performing opportunities are in India but the price is there is correspondingly high. Conversely, for a low price, you can acquire lower performing Russian equities. For the moment, then, Coutts are overweight on both European equities and Japan.
But it’s not possible to focus solely on equities; that is always too risky a position and Coutts clients want balance. But bond yields are low at the moment — and actually tend towards the negative: a 2% return over 10 years is poor. The only strategy that has succeeded in matching bond yields to equities over recent times came with the name of Bernie Madoff.
There are two strategies that make more sense at the moment. The first is to invest in funds that track market neutral positions, such as Tesco v Sainsbury’s. The second strategy resides in the Eurozone: with the market predicting falls in dividends, there is an opportunity for some prudent bond replacement attacks.
And of course commercial property remains a popular investment. When bond yields are this low, investors search for alternative sources of income. Buildings that are available on long leases perform like strong bonds. Buy-to-let property is also still a good deal outside London, even with recent changes to stamp duty and taxes.
Alan drew his remarks to a close and asked for questions. With a fair number of financial sector representatives among the audience, the questions tended to reflect that bias.
When Will UK Interest Rates Reach the Projected 2.25%?
Alan thinks it will take anywhere from 2 to 4 years before the UK sees interest rates hit 2.25%. The UK is likely to follow the December US rate rise but not until Q2 2016. It’s worth noting that of the several countries that have previously raised rates more quickly, most of them are now cutting them again.
The Possible Negative Effects of a Brexit.
An exit from the EU would certainly influence the markets, if only because of both the US and Japan. However, the UK’s very weakness — its balance of trade deficit with, among others, Germany — is actually its strength. None of the current trading partners who rely on the UK market are suddenly going to stop selling to us because we are no longer in the EU. Alan felt that any fears felt by British business were more to do with potential operational and administrative hassle than anything worse. As ever, there is an investment opportunity to bet against the wisdom of the crowd. As an example, Alan said that the best performing bonds of 2015 were Greek bonds and Russian dollar bonds. The latter were up 25% on the year.
Has The Problem in Greece been Contained?
Alan believes that Syriza had no bargaining chip because, despite domestic support, the majority of Greeks wanted to keep the Euro. The problem has been contained but there has been a technical default on the debt because repayment conditions have changed. There is now a schedule of longer term repayments. The future will see for Greece, as with countries like Portugal, a period of internal devaluation where prices fall to attract tourists.
How Will Britain fare in the Manufacturing Rebound compared to the Rest of the EU?
Alan was in no doubt that Germany will do best out of any manufacturing upturn. But if world GDP grows, that’s good for the UK, even if it under-performs compared to Germany. Of course while we were on the subject of Germany the next question was obviously…
How Will the VW Emissions Scandal affect the Company?
Around 50% of VW group car sales are to China. In a survey of 50 of the largest dealers there, 49 had no knowledge of any ‘scandal’. It’s clear that sales there will be unaffected. Closer to home, there is no doubt that the company will receive financial support, where needed, from both banks and government.
There was a chance for more questions over coffee and further networking before Alan graciously allowed us to whisk him into a small side room where we could ask him to recap some of his remarks. You can see his answers in this accompanying video.