Realism needed in the search for yield

He told a CBI audience:

We can expect, I believe, a continued period of low inflation and perhaps a slow recovery. In those circumstances, it will be important for companies to be realistic and not to build plans for the future on the expectation of double digit growth in revenues.

For individuals there is the same need for realism in both borrowing and investment decisions. At the FSA we have been concerned for some time that house prices in London and the South East are as high in relation to the rest of the country as they have ever been. And the multiples of salary at which many people have been prepared to borrow continue to rise.

Of course, with interest rates where they are the borrowing affordability index is still low. But that is no comfort to someone who loses his job and finds he has negative equity in a house he can no longer finance.

Just as damaging are those tempting offers from salesmen of guaranteed double digit returns, from with-profit bonds, hedge funds, or highly leveraged investment trusts perhaps of the split capital variety, offering separate income and capital shares. The income projections sound attractive, but the risks on the capital side are not so prominent in the sales pitch.

In current markets there is no such thing as a double digit risk-free return. Yet it is surprising how many people seem to forget that when they clip a coupon in the Sunday papers, or have lunch with their broker or financial adviser.

Just now there are many financial engineers around who are keen to pretend that they can beat the market, and provide boom-time returns in a downturn. It just isnt possible, without taking big risks.

Howard Davies concluded:

But in spite of everything, I am not pessimistic. The British economy is in much better shape than it was in the early 1990s and our banking sector is strong and well capitalised an important national asset in difficult times. So I forecast a challenging twelve months ahead, but not worse than that.

Notes for editors

1. Howard Davies was speaking at the CBI Southern Region Annual Dinner at Egham, Surrey.

2. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

3. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.