Forsooth! A soothsayer has his say

We’ve reached that time of the year when, in addition to most of us winding down for the festive period, an element of star-gazing becomes de rigueur  across the financial sector as soothsayers of varying ability dust down their crystal balls and endeavour to predict the future.

Folks have been attempting this since time began, using a variety of theories and signs to forecast forthcoming events, though few can point to any form of consistency.

Indeed, were it possible to be alone in identifying eight score draws on the coming weekend’s football pools coupon and scoop several million pounds in tax-free winnings, I suspect a way would have been found of doing so. However, although it’s only a few days away, none of us, not even the world’s greatest forecaster, have any idea which matches will finish level.

Our collective inability to accurately forecast what will happen within a few days does not, however, discourage a motley collection of economists, fund managers, financial analysts and others – even financial blog writers – from having a crack at considering the outlook for 2013 and submitting our thoughts to paper. So here goes.

I do not think it will surprise many readers when I suggest (or should that be predict?) that interest rates will remain depressed throughout next year.

This, of course, is bad news for savers and those on fixed incomes, particularly as inflation continues to erode the real value of cash. But under what circumstances could the Bank of England start raising rates? The most obvious would be if our economy started over-heating, but as any soothsayer worth his salt will tell you, there’s only two chances of that – a dog’s chance and no chance.

Many savers will continue to be tempted to seek alternatives such as retail bonds, where promised returns are higher than bank deposits, and accept the associated risks. There has been a flurry of high-yielding corporate bond issues of late, though it’s worth noting that this month’s planned Stobart (as in Eddie) bond was pulled. Have the quality corporate bonds now gone? I suspect not, but as 2013 approaches, would-be bond investors should read the small print before buying into these attractive-looking securities and consider where they are in the pecking order should matters go pear-shaped at the company issuing the paper.

I fancy that gold and silver will become even more popular next year, so ensuring that demand for these precious metals will at least maintain values at their current levels, pushing them a shade higher during times of acute political uncertainty.

Increasingly, people take understandable comfort from owning precious metals because while they offer no immediate dividend return, their role as a store of value offers a reliable alternative to a high street bank.

Ah, banks. I forgot to send mine a Christmas card this year; hope you didn’t too. They might feel a little, ahem, unwanted.

The banking sector’s prolonged isolation is doing no-one any good. Sooner or later, these institutions must re-join – and play an active, positive role in – society.

The problem is that, for the most part, our banks are run by the same, or a very similar, coterie of people who screwed up and caused our problems in the first place. I’m not sure how they can extricate themselves from the resultant mess, primarily because they don’t know how to.

Granted, most have had their balance sheets boosted with Bank of England handouts, aka quantitative easing, a process which is building up enormous inflationary pressures, but unless that state-supplied cash starts feeding into the economy as mortgages and business loans, then banks’ principle role as commercial entities will be questioned. Why not let the BoE simply lend direct to businesses and home owners and cut out the middle man? I imagine this argument will be regularly aired over the coming 12 months.

From an investment perspective, America will continue to offer a safe haven for investors buying many US-facing funds, while at least three of the BRIC nations will motor as their burgeoning middle classes drive their respective economies forward. The exception is Russia which must shed accusations of being a gangster state if it is to be taken seriously. I would put a lot of money on this not happening next year. Or the year after.

As for UK equities, the focus on quality is likely to remain undimmed as the government endeavours to grab as much money from those building their pensions or simply putting cash aside for a rainy day. Several tax allowances will increase next year and everyone would be well advised to make full use of them before they’re pulled.

By the way, if all else fails, any eight from ten costs just a pound. Merry Christmas.

posted on 21 December 2012 10:50 byPJS