Ken Taylor: Far too gloomy about the debt crisis? I don't think so, nor will IMF

I HAVE been accused by readers of my more recent columns of being too bearish in outlook as far as investment markets are concerned.

Recent surges in equity markets have unquestionably contributed to this perception, and certainly the renewed appetite for risk among investors is hard to ignore. With this in mind, I would like to explain why I retain a high degree of scepticism regarding further growth in markets, particularly those that rely on participation and support from UK consumers.

A big theme for me has long been people's inability to learn from their mistakes, or to take decisive action when it becomes clear that change is required. For example, many of those making huge gains in their portfolios over the past year have not been shy in boasting about it. I have yet to encounter one such winner who has actually realised their gain, and that is before further exploration reveals these gains have at best got them back to parity from disastrous returns in previous years.

I read a very disturbing article this week which covers the complete inability of the main political parties to address the severity of the debt crisis that the UK finds itself in, suggesting that to speak anything close to the truth would automatically deem them unelectable. It takes us back to the dark days of the mid-1970s, when we needed to be bailed out by the IMF.

At that time, national debt represented 45 per cent of GDP and was rising at about 8 per cent a year. Truly dreadful, until you realise that the current debt figure is 65 per cent of GDP and rising at 13 per cent a year. And before such figures are dismissed with the simplistic view that it was different then, it is worth remembering that if we add in the unspoken cost of public pensions, then the true figure of our debt actually soars to 125 per cent of GDP. In 1976, the equivalent figure for pensions liability was 20 per cent. Sobering indeed.

The conclusion to be drawn from this is that, regardless of the outcome of the election, some serious medicine needs to be dispensed, and quickly. It would be nave not to appreciate that the rest of the world is watching closely, and there is a real chance that sterling may come under severe pressure.

The cuts, which will be both severe and prolonged when they arrive, could end up being called by the IMF if the next government does not grasp the nettle. For what it's worth, I predicted a hung parliament back in December and, remote as that appeared then, it is becoming increasingly likely. Sadly, in many ways it is actually an election to lose – at least for career politicians.

So investors need to be mindful of the reality of the fragility of our economy and the potential threats that exist. If you have been lucky enough to make gains, you should at the very least be seeking to bank those profits, perhaps to reinvest and achieve some diversity. Never be afraid to move to cash when it is prudent to do so, and you are likely to be rewarded handsomely in the coming years. In other words, respond to change.

• Ken Taylor is director of Mackenzie Taylor Wealth Management