Can you profit from the political turmoil?
We explain what our hung parliament and the euro crisis mean for savers and investors.
By Emma Simon and Rosie Murray-West
Published: 9:52AM BST 11 May 2010
Economic turmoil in Europe and political uncertainty at home are conspiring to send stock markets, bond markets and currency markets into overdrive. Share prices may have been buoyed by the Greek bail-out, but Gordon Brown's resignation announcement yesterday caused the pound to lose about 1½ cents against the dollar. These events are having a huge effect on the personal finances of many worried readers. Below, we give answers to the financial questions that are troubling many ordinary households hit by problems at home and abroad.
IS THE GREEK BAIL-OUT GOOD NEWS FOR UK INVESTORS?
Both the size and the scope of this bail-out have helped to stabilise jittery stock markets around the globe. European finance ministers have also unveiled a financial plan that effectively guarantees the debt of any country that uses the euro.
It is hoped that this will stop the Greek debt crisis affecting other EU countries – in particular Spain and Portugal – and prevent a run on the euro.
In the short-term, at least, the plan appears to have worked, with the FTSE100 rising by 5 per cent yesterday, and the euro strengthening against the dollar after hitting a 14-month low the previous week. This can only benefit those with pensions, Isas and other investment portfolios that are largely invested in UK and European shares.
However, this rescue package has to be backed by action from various European countries to reduce budget deficits. If this does not happen it is likely to weaken the euro again, which could have a negative effect on stock markets both in Europe and the UK.
WHY HASN'T THE UK'S HUNG PARLIAMENT SENT SHARE PRICES TUMBLING?
There had been speculation that political uncertainty in the UK would cause stock markets to wobble – potentially wiping millions off people's pensions and investments. In fact, the reverse happened, and share prices rose yesterday. This was because the more immediate situation in Europe is, for now, taking precedence. However, it remains to be seen how stock markets react today to Brown's announcement, as this creates further uncertainty.
SHOULD I HOLD OFF INVESTING IN THE STOCK MARKET?
Markets look set to be volatile for some time. During such periods of volatility, investors are advised to drip-feed money into markets, to reduce the chance of investing a lump sum just before a sharp drop in share prices. Investment experts, such as Darius McDermott of Chelsea Financial Services, says that those with money to invest should use any volatility in the market to their advantage and drip-feed money in on days when the FTSE has fallen.
Investing a sum of money on a regular basis – such as making monthly contributions to a pension or Isa – can smooth out these ups and downs and prove beneficial in the long run. This is known as pound cost averaging.
HOW DOES THIS AFFECT UK GILTS AND BONDS?
The guarantees only underpin the debt issued by countries in the eurozone. There is no guarantee given to the debt, or loans, issued by the UK Government. These bonds, known as gilts, will, however, be adversely affected if the ratings agencies, such as Standard &Poor's, decide to "downgrade" the UK's credit rating. This could happen if there are more delays in forming a new government, or disagreements about how the deficit should be reduced. A bigger threat to the bond and gilt markets is inflation. If this does not reduce this year it is likely to cause interest rates to rise, which will have a negative impact on gilt and bond yields.
I AM DUE TO BUY AN ANNUITY WITH MY PENSION POT. SHOULD I DO IT NOW OR HOLD OFF UNTIL LATER?
On the surface, uncertainty surrounding the hung parliament should be good news for your annuity, with gilt yields rising and pushing up annuity rates. However, Laith Khalaf, a pensions expert at Hargreaves Lansdown, says: "There is no certainty about what will happen to annuity rates."
He said companies were using other investments, such as corporate bonds and equities, to back annuities, and that the annuity marketplace was not currently that competitive.
He said anyone considering buying an annuity should get a quote now, which could be valid for between 18 and 45 days. These quotes are available from providers such as annuitysupermarket.com, annuity-bureau.co.uk and h-l.co.uk
ARE INTEREST RATES LIKELY TO GO UP NOW?
Some people may be concerned that
during the last recession, under the Conservatives, interest rates shot up to 15pc, but a rise of this magnitude looks unlikely. The Bank of England will be forced to raise rates if inflation increases, but even the most hawkish economists are predicting only modest rises.
WHAT ABOUT FIXED-RATE MORTGAGES? ARE THESE LIKELY TO INCREASE?
The cost of fixed-rate mortgages has actually fallen slightly over the past week, despite some sharp fluctuations in the money markets, which determine the price of these deals. David Hollingworth, of London & Country mortgage brokers, says there was a spike in these markets after the last set of inflation figures, but this has not fed through to higher mortgage prices. Earlier this week, both Northern Rock and Nationwide reduced the cost of their fixed-rate deals.
"There is now more 'fat' built into the pricing of these deals, so lenders can ride out such short-term fluctuations," he says.
I WAS HOPING TO BUY MY FIRST HOUSE THIS YEAR. WILL I NOW HAVE TO PAY STAMP DUTY?
In the last Labour budget, Alistair Darling announced that first-time buyers would not have to pay stamp duty on properties priced less than £250,000. Neither the Conservatives nor the Liberal Democrats will want to repeal this. Other changes could see the abolition of Hips (Home-buyers Information Packs), which both other parties say are an expensive brake on the property market.
WHAT WILL HAPPEN TO MY CHILD'S CHILD TRUST FUND IF THE SAVINGS SCHEME IS SCRAPPED?
The Tories have suggested that the Child Trust Fund (CTF), which was one of the pioneering savings schemes of the Labour government, will be scrapped for all but the most deprived families. Doing so is likely to require primary legislation, according to Martin Shaw, chief executive of the Association of Financial Mutuals, since the current legislation suggests the trust funds are universal.
He said that although it is not yet clear what would happen if the funds were scrapped, indications are that accounts that are already in place would run until their recipients' 18th birthdays, when they would become Isa-type accounts.
Children who are currently below the age of seven would be unlikely to get Government top-ups to their accounts unless they have parents on very low incomes.
He suggested that legislation scrapping the accounts could come into force as early as July if it was included in a finance bill, and urged those who had not yet invested their CTF vouchers to act quickly. The voucher is sent when a child is registered for child benefit.
I AM HOPING TO GO ON HOLIDAY ABROAD THIS SUMMER. WHAT WILL HAPPEN TO MY SPENDING MONEY?
The currency market is hard to call at the moment, with the pound's position against the euro confused by events in Greece. It has already strengthened this week, and Duncan Higgins, market analyst at the currency group Caxton FX, expects it to strengthen further if details of any Tory and Lib Dem pact are fleshed out.
He said that those choosing between the eurozone and the US as destinations should bear in mind that the US recovery is outstripping ours, and this will cause continued weakness against the dollar. "Against the euro our position is better, as the bail-out is really treating a symptom rather than a cause and there will be ongoing problems," he says.
However, he also warns that if a coalition government is announced and then does not work, or there are further shocks, the pound will fall further.
If you see an attractive rate against the euro you can lock into it by using a prepay currency card for your travel money with either Caxton FX or FairFX. If you require more money, for example if you have a second property in the eurozone, you could take out a forward contract with your broker now to hedge yourself against any losses.
http://www.telegraph.co.uk/finance/personalfinance/investing/7709528/Can-you-profit-from-the-political-turmoil.html
