Important information - The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Young people get accused of lots of things. Spreading Covid with their selfish raves. Melting like snowflakes at the slightest criticism. When it comes to pensions, however, it’s hard not to sympathise.
For one thing, they are going to have to wait a great deal longer for their pensions than their parents or grandparents have had to. For another, they are going to have to pay a great deal more to generate a comparable income thanks to what looks like being perpetually lower investment returns and interest rates.
Perhaps even more galling, they are now forced to watch from the sidelines while today’s pensioners receive a hike in the state pension from next April of five times the current rate of inflation.
The reason for this anomaly is the so-called triple-lock which promises pensioners an income that rises at the highest of three measures: the rate of inflation each September; the increase in average earnings; and 2.5%.
Today’s unveiling of a 0.5% inflation rate in September and stagnant earnings (for a range of reasons, not just the pandemic) mean that the 2.5% rise in the state pension automatically kicks in this year. For those who retired after 2016 that means an extra £229 a year, a bit less for those who retired before then.
So, if you are over-75, and fuming about the BBC’s demand that you now have to pay for your own TV licence, next year’s hike in your pension will cover that and still leave you £70 on top.
Anyway, enough solidarity with the kids! What about that inflation data?
The 0.5% increase in prices in September was a fraction less than forecast but well ahead of the 0.2% rise in the prior month thanks in large part to the ending of Rishi Sunak’s Eat Out to Help Out scheme which slashed the cost of restaurant meals in August. That alone pushed prices in catering services up by 4.1%.
Airfares, which normally fall in September after the school holiday hikes end (something else for younger people with kids to moan about by the way), fell by less this year because, for obvious reasons, they had risen by less over the summer. That also pushed inflation a bit higher.
But these upward pressures were offset by lower prices for food and non-alcoholic drinks, holidays, recreation and cultural activities.
The net result is an inflation rate that is still running well below the Bank of England’s 2% target. That almost certainly means that more quantitative easing is on the way - another £100bn of bond-buying by the central bank looks likely. It also most likely means that negative interest rates are under serious consideration in Threadneedle Street once the Bank has worked out how to make sub-zero interest rates work most effectively and with a minimum of unintended consequences.
And what does this mean for investors? More of the same, really. Savers will continue to find the meagre returns they can earn on cash deposits eroded by inflation, even the feeble inflation we’re currently experiencing.
Stock market investors will benefit from persistently low interest rates, which will keep bond yields low and so increase the attraction of both long-term growth stocks, for which higher valuation multiples can be justified, and income-paying shares, which continue to offer many multiples of the risk-free rate.
In terms of the rotation from growth to value that we have talked about quite a lot recently, the latest data probably mean that this remains in the future for now. For the time being, reliable growth will be rewarded rather than contrarian value opportunities.
In terms of our favoured Select 50 funds, this argues for the more growth-oriented funds such as the Liontrust UK Growth Fund, one of my recommended funds this year, or a new addition to the list, the Fidelity UK Select Fund. I’m glad to say that Julian Fosh, the manager of the Liontrust fund will be joining us soon for an interview, so look out for that in the next couple of weeks. You can catch up on the thoughts of Aruna Karunathilake, who manages the Fidelity fund, here.
As for value-focused funds, like Fidelity’s Special Situations, there might be a little wait for its time in the sun but I, for one, am not planning to miss out on the often-explosive return to favour that this investment style enjoys when the economy does eventually pick up. My personal portfolio holds a few different UK styles so I’m agnostic when it comes to the growth versus value debate.
Rather, I’m looking to benefit from the lifting of the Brexit shadow from UK markets in the next few weeks. I don’t know any better than anyone else what the outcome of the eleventh hour talks between the UK and EU will be. But I suspect that once we know what the future holds, either way, the value of the out-of-favour UK market will start to look compelling.
For more on this view and my other geographical and asset class opinions, catch up on the latest Investment Outlook report and webcast with Emma-Lou Montgomery here. Or listen to the podcast I recorded with Ed Monk here.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.