Bill Jamieson: Game–changing events happening off stage

IN STOCK market investment, it is events away from centre stage that prove the game-changers. The centre stage last week was dominated by the Budget and its aftermath. But how much of a long-term game-changer will it prove?

The forecasts of UK gross domestic product (GDP) growth from the Office for Budget Responsibility are barely changed from November – and the projections for growth in 2013 and beyond are still regarded by most independent analysts as too optimistic. Meanwhile, the sobering assessment from the Institute for Fiscal Studies was that the combined effect of the budget measures would be to lift UK GDP growth over five years – by just 0.1 per cent.

Triple-A credit rating retention critically depends on spending cuts that have been pushed back to the 2015 election year and beyond, while overall total managed spending continues its inexorable rise from £683 billion in 2012-13 to £756bn in 2016-17.

With all the cuts to Whitehall department spending, how can this be? The reason is the first item of annual government spending – the great unmentionable of politicians: debt interest. This continues its inexorable climb, from £45bn in 2012-13 to £64bn in 2016-17. Plus ça change.

The two game-changers that should be of concern to investors are more likely to be the rise in the oil price to $140 per barrel and ominous signs of a return of sovereign bond market instability in the eurozone. These were among the factors behind a 1.86 per cent fall in the FTSE 100 index to 5,854.9 last week. Other markets also suffered, with Wall Street lower and the FTSE Eurofirst 300 Index down 2.47 per cent.

Massive monetary easing by the European Central Bank has helped to pull the eurozone back from the financial brink, but the underlying problems of economies in Greece, Spain and Portugal are still in front. And it is these that are more likely to prove stock market game-changers.

Pensioners are not all retiring to a bed of roses

THE Budget “granny tax” grab has fuelled controversy on inter-generational disparity between young and old. Today’s baby boomer retirees are said to be enjoying a higher real income and wealth compared with 40 years ago, while young people today face university tuition fees and daunting deposits for home purchase.

I do not dispute that the wealthy old should make a contribution to debt reduction, but the Budget change should not have been sneakily disguised as a tax simplification. I would also counsel against the misty-eyed view of how wonderful life was for today’s retirees. In the 1970s, mortgages were limited to a multiple of income (three to three-and-a-half times), a chunky deposit was required and as a first-time buyer, I remember having to produce a building society pass book with a record of regular saving. Mortgage rates were frequently in double figures, while house price inflation has not enabled me to buy a bigger home. High inflation has eroded the real value of saving, while Pep and Isa saving has had to contend with three bear markets in the past decade.

There are also two key points that those clever-clog proselytisers of the “pampered pensioner” school overlook. First is the terror older people have of spending their final years in poverty. The second is that retirees have paid tax and National Insurance over several decades – an experience yet to be enjoyed by those quick to leap on the “let the pensioners pay” bandwagon.

Look to the longer-term performance for truths

Advice on stock market fund and trust selection is often driven by short-term relative performance comparison. But under-performance here should not by an automatic disqualifier – particularly if the underlying portfolio is providing the investor with real diversification.

I am grateful to Kieran Drake, Simon Elliott and James Brown, the investment analyst team at Winterflood Securities, for their latest note on the Baillie Gifford-managed Scottish American Investment Trust, which well illustrates this point.

Over the year to last Friday, this £307 million global income and growth trust has achieved a gain of 3.2 per cent while the sector overall is up 5.8 per cent. But the trust is more genuinely diversified than most of its peers, with a portfolio ranging over UK and overseas equities, fixed interest, commercial property and unquoted companies. Given the outlook for a subdued year of global growth, this surely makes sense.

Not only is the equity portfolio highly diversified, but the trust has bond and money market holdings and some 5 per cent of assets invested in listed property and forestry, thus making full use of the greater freedom investment trusts enjoy over their unit trust counterparts.

As for longer-term performance, the trust is up 120.5 per cent over three years compared with an 80.8 per cent sector gain, helping to make good the sharp fall suffered as a result of over-exposure to financials and mining shares. In addition, it has an attractive 4.21 per cent yield.