Global equity markets are soaring, and in the UK those fretting over the size of the UK’s pension deficit have reason to celebrate.
According to pension expert, Stephen Yeo, from Watson Wyatt, the pension deficit of the UK’s largest companies has reduced by 25% since the beginning of March.
With the FTSE 100 passing the 600 mark for the first time in five years, with the Dow Jones and NASDAQ both recently hitting five year highs, while the Japanese Topix index recently soared to its highest level in 14 years, equity investing has become profitable again.
The cynics, of course, proclaim the end is in sight, that the party will be coming to an abrupt end. But then again, Warren Buffet, the world’s most successful investor, and not a man known for hyperbole or for adopting a sheep mentality rashly pouring in his billions behind market sentiment, has taken a £14bn long term position on the market. - In other words- he has invested £14bn of his wisely gained assets in the belief the markets have got a lot further to rise.
In the bad old days of the first years of this decade, as equities plummeted, pension companies with new FSA regulations on insolvency forcing their hand, sold equities and moved into bonds.
But the strategy backfired, the yield on bonds fell, forcing companies to sell more equities and buy more bonds still, while at the same time share prices started to rise. But some pension funds suffered the worst of both worlds. They lost when shares fell, didn’t see a proportional gain as prices started to recover, and instead moved into the rapidly worsening bond market.
But such has been the equity improvement, that even pension funds which were hampered by the FSA’s well meaning, but sometimes backfiring policies, are seeing their values rise again.
Even bond yields are improving. The yield for example on a Eurozone ten year bond is now at its highest level for 18 months and in the US the yield on a ten year bond is now at its highest level since 2002.
2005 saw the re-emergence of a worrying phenomenon, the inverted yield-curve. Usually, the rate of interest is higher the longer the term of borrowing. So a ten-year bond, for example should carry a much higher yield than the short-term rate of interest set by the central bank. But in the US, this curve went the other way, and inverted. In the past, an inverted curve normally heralded an economic recession.
The bulls said this time it’s different. The US rate of interest has risen so rapidly since the summer of 2004 that it’s hardly surprising long term yields have not yet caught up.
The bears, on the other hand, warn that when people say this time it’s different, you know you are in trouble.
The good news is that the curve is inverted no more; it’s merely flat, ie short term and long term rates are more or less in unison.
With the global economy set to grow, the savvy investor should be able to look forward to years of growth. And the pension funds, if they play it right, should be able to climb out of the abyss the stock market crash left them in.
The danger lies in government regulation, designed to reduce risk, ultimately creating more risk with our future prosperity.
Sources
Share price surge helps to cut pensions deficit Personnel Today
Global markets rise to record highs Guardian
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