VIRTUALLY every developed nation is suffering from the reluctance of investors and chief executives to invest in new businesses, jobs or ideas. They’ve adopted a wait-and-see attitude because markets are missing the two components essential for confidence: trust and certainty.
Investors are angry and cynical. For five years, they have consumed a daily diet of gloomy headlines. Scandal after scandal in the financial industry has left many believing the markets are stacked against them. And those who stayed the course over the ten years through to 2009 suffered a lost decade, with average total returns of less than 1 per cent per year on the FTSE 100. Investors see little consensus in government for tackling long-term fiscal and competitive challenges. The result is uncertainty, a lack of trust in political institutions, and paralysis in markets.
This urge to sit on the sidelines is not only inhibiting economic growth, it is exacerbating the silent crisis of inadequate retirement savings. This crisis is already a reality for older workers, the value of whose nest eggs has plunged. Many must now find other sources of income over the longer term.
Unless we can educate younger workers to begin saving for retirement now, the savings gap will only widen. Someone entering the workforce at age 22 and who saves £2,000 a year can accumulate £500,000 by age 62, assuming an annualised return of 8 per cent. If that worker waits until 32 to start investing, he or she will have to save more than twice as much each year to reach the same goal at the same rate of return.
Restoring investor confidence begins by recognising that, for all the challenges that remain, there are signs of life in financial markets. Investors with a long-term perspective have benefited from the rally in US equities over the past two years. There is also cause for cautious optimism about the outlook for the global economy, including actions to prevent the breakup of the euro; continued, if slower, growth in China; and the beginnings of a US housing recovery.
Make no mistake – markets will remain volatile. The unprecedented impact of political risk all but guarantees it. But this volatility also creates opportunities to invest at attractive prices. UK equities are historically cheap, at a price-to-earnings ratio of 11, down from a 20 year average of 17.
Continued progress, however, requires action from finance and government to restore trust and certainty.
In financial services, we must be seen as part of the solution, not the problem. This requires constructive engagement with regulators on mechanisms that, without choking off investment, introduce greater clarity.
Financial firms must be crystal clear about how their interests are aligned with those of their clients, and should be transparent about the fees and risks associated with the products they sell.
Financial education and transparent investment products can allow investors to capture market opportunities and achieve the returns they need to meet their objectives. This too will help restore trust in the markets, and help those who doubt in the future to take their first steps back to being investors again.
Investors cannot do this alone. Business leaders and our elected representatives also need to take a long-term view and restore a measure of confidence about the future under their stewardship. Nothing weighs on the markets more than indecision.
Regardless of who wins the US election, attention is shifting to whether Congress will lead the US off its fiscal cliff. Failure to avert this would plunge the country back into recession. Because of the uncertainty, businesses are already delaying investments and hiring. Only a bipartisan resolution can address this looming challenge and tackle the tough, longer-term issues of US debt and deficit reduction.
Another source of uncertainty comes from many countries’ complex tax systems. EU governments, having pledged to bring budget deficits back in line with EU rules, have had to tweak both spending and taxation. Such uncertainty and ambiguity discourages consumer and corporate spending, imposing a tangible cost to economic growth.
In my business, we explain to investors that they cannot save for the future in the future. It’s too late by then. The instinct to preserve what we have today is a powerful, human one. But it will not build what we need for tomorrow.
James Charrington is chairman of BlackRock Europe, Middle East and Africa.