February 2012, Business Breakfast with Alan Higgins.

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What’s Happening in the Current Economy.

Alan Higgins, Head of Investment Strategy at Coutts addressed businesses at the Like Minds and Forum monthly breakfast in February.

Alan spoke about the current state of the world economy and what we might expect to happen over the next few years, drawing on his own financial and economics expertise from within one of Britain’s most established banks. It is, of course, he said, all about debt.

At the centre of the storm is the issue that certain governments have too much of it – it looks as if Greece will sadly have to leave the Euro, as their personal, domestic, debt levels are all too high. On the other hand, while there is concern in the markets about Italy, their household debts are relatively low, and so they should weather the storm well.

They have, in other words, native wealth, much like Japan. In Ireland, the UK and the US, as we know, personal debt – mortgages, credit cards and so on – is high. There are low interest rates but the de-leveraging that is happening means this is almost psychological. What does it mean? The average Coutts customer is cash rich and has been used to big returns on cash. But we’ve given up on inflation now. Rates will most likely not rise for another five to ten years.

The pattern is one of financial repression, which we have seen before, which means that current low interest rates are here to stay. Coutts’s advice is to go floating on the borrowed side. This also means that any interesting income stream is very attractive. Despite all this, the financial markets are doing relatively well – why?

To our mind, said Alan, it’s quite simple. We’re down 10x earnings in the UK. If you buy at the right valuation, the market is very forgiving. It acts like a magnet, dragging the market up. Andrew Rubio (CEO: Throgmorton) asked whether: if inflation isn’t too important anymore, what’s the point of qualitative easing? Alan replied that when a government has revenues less than costs, they issue government bonds, gilts essentially, and the plan from UK and US is to buy them ourselves – yet the yields are very, very low.

Commercial property currently yields at around 5% and yet that’s attractive. How you create inflation is through credit – and it’s not inflationary yet. But it’s much more important to stabilise the economy and to reduce debt. Jamie Taylor (partner: Collabrium Investment Advisors) asked whether emerging markets were worth considering. Alan replied that the good news is that emerging markets are cheap and they also don’t have excessive government debt. On the other hand, they are very vulnerable to the vagaries of the financial market and if the Euro issue explodes it could affect the emerging economies very quickly. But, he said, we do like to have emerging markets in our portfolio.

Drew Ellis, (Founder of Like Minds, and the co-creator of the Forum breakfast speakers’ programme), asked the hot question on everyone’s lips at the moment – what did Alan think of the rumoured $100 billion valuation of Facebook, if it floats this year? Alan said that the valuers must suppose it can make $8-10 billion profit and that’s what gives it that valuation.

Alan felt that the markets previously had underestimated Google and probably should be careful not to repeat that mistake with Facebook. Alan did not pretend to understand the world of digital social networks – his son constantly bewilders him with news from his business of digital advertising – and believes its valuation is a specialist job and it has to be, to a degree, a leap of faith.

Drew made the point that if Facebook isn’t valued at $100 billion there’s a danger that it could cause the same bubble to burst as happened in 2000-1. There’s a real consideration for those millions of businesses who have 20% dependent on the digital platform. James Horne (Founder: Guns On Pegs) said that every user on Facebook is valued at $88 – looked at that way, the proposed valuation seems almost cheap. The sheer benefits for every user are absolutely astonishing.

Yes, said Alan, there may be something in it – but he emphasised that he’d like to go on record as saying that this is not a recommendation from Coutts to buy into Facebook!

Finally, Mark White (Senior Director: GVA Grimley) asked whether Alan thought Cameron’s decision to opt out of the Euro pledge was a good or bad move?

Concerning the issue of commercial property, Alan said Cameron’s stance was not of significance. Coutt’s is an international brand and has big business in Asia and the Middle East. All of their high net-worth individuals still want to buy a property in London, and if they have, say, a six-year-old child, they will buy them a property too and not even bother to rent them out.

We need Peter Mandelson to explain the politics behind Cameron’s move, said Alan, as they struggled to understand the motives behind it. It all seems a bit curious from an economical point of view, but at least it doesn’t seem to have harmed the UK. And with that, Alan Higgins put his coat on and rushed to his key strategy planning meeting at Coutts – perhaps to discuss which emerging markets they would be buying into next …

This Business Breakfast was held in association with Private Members Network Forum.