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Theresa May's economical impact and increasing income without the risk

07 October 2016

Does May make a difference to the economy?

The transition from David Cameron as the Prime Minister, to Theresa May could mark a significant change to the way the UK economy is managed. The Conservative conference this week has given us an indication of what is to come.

In 1998, Gordon Brown made the Bank of England independent of government, setting them an inflation target of 2% with a requirement to explain if inflation deviated by more than 1% from this level. Interest rates are their main tool to manage the economy. As growth slowed post the financial crisis, interest rates were cut and the Bank bought bonds to keep long rates lower. As the economy began to recover, the Bank left rates unchanged as austerity measures by the government came into effect. What is clear is that monetary and fiscal policies are interlinked in the management of the economy. Even though the Bank of England’s decision making process may be independent, in practice they have to take government policy into account.

Post the vote for Brexit, the Bank of England took strong action to support the economy, cutting the base rate further and buying bonds. Governor Carney made it clear they were prepared to do more but not to go to negative interest rates as we have seen in Europe and Japan. The monetary policy committee also indicated that they were prepared for savers to suffer for the greater good. Thus we expect inflation to rise short term but not to cause a rise in interest rates: not good for savers with cash in the bank.

Low interest rates have supported asset prices but we have seen little of the trickle down into the broader economy. It has made the rich richer but has done little for the poor of the country. When Theresa May came into office she indicated that she wanted to lead a more inclusive government. The Chancellor, Phillip Hammond, announced that he was abandoning George Osborne’s target to balance the economy by the end of this parliament. Theresa May in her closing speech focused on the plight of savers saying “People with assets got richer. People without them suffered. People with mortgages have found the debts cheaper. People with savings have found themselves poorer. A change has to come, and we are going to deliver it”.

What does this mean for investors? These are fine words but we will have to see what changes are made in reality. The autumn statement will give us more details and we will watch this closely. The impact of government spending will be supportive but slow to come into effect. The Bank of England is likely to continue to keep rates low and carry on buying bonds for now. A wider strength to the UK economy can only be good for us all long term.

Does Theresa May make a difference? Maybe.

How can I increase the yield/income of my investments without taking on more risk?

In life, you don’t get anything for nothing. An increase in income inevitably means giving up on possible capital gain or taking more risk. With deposit rates close to zero and bond yields low this is a question many people ask. UK equities in general yield more than bonds but carry higher volatility and risk. However, if yields began to move back up the loss on longer dated bonds may exceed the loss on equities. With Central banks continuing to buy bonds, this is less risky in the short term. High historic dividend yields on equities can be misleading. An excessive payout may not be maintained and if it is, it may be at the expense of capital. Within bond portfolios, extending the maturity of bonds or reducing the credit quality will also increase income but both these moves increase risk.

An excessive focus on income may not be beneficial to the risk and return profile of a portfolio. The best approach, where possible, is to look at a portfolio on a total return basis rather than targeting a specific income level, using both income and capital to fund your needs. For higher rate income tax payers this may also be a better approach to take, since capital gains tax rates are currently lower than income tax rates.


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