ALEX BRUMMER: Beware of politicians interfering in the markets

By Alex Brummer

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Political risk has long been a clear and present danger in financial markets.

In global terms the most obvious risk currently is the ‘tapering’ of quantitative easing in the United States and its likely further impact on emerging markets.

In Britain at present Ed Miliband’s speech at the Labour party conference, when he proposed more aggressive government intervention on a series of fronts from energy prices to housebuilding, has opened the door to a whole raft of new risks when it comes to equity investment.

The biggest impact of prospective political interventions so far has been in the energy sector with share prices down an alarming 20 per cent since Ed Miliband's speech promising a price freeze, says Alex Brummer

The biggest impact of prospective political interventions so far has been in the energy sector with share prices down an alarming 20 per cent since Ed Miliband's speech promising a price freeze, says Alex Brummer

When governments start to interfere directly in markets, disturbing the price setting mechanism, equity prices suffer and so do all our pensions and savings that are tied up in shares.

Indeed, because of dreadful returns in deposit accounts and bonds much of the public is more exposed to equities than at any time in recent history.

 

The biggest impact of prospective political interventions so far has been in the energy sector with share prices down an alarming 20 per cent since the Miliband speech promising a price freeze.

The Tory response has been to dream up its own market interventions with promises of changes in green taxes. It has only served to increase the muddle.

The dangers of fiddling with free markets are partly illustrated by the recent decision of RWE owned Npower to axe a large scale wind farm project and outsource billing services to Capita and India as it seeks to shave costs and investment.

Perversely, both these decisions will, over the longer haul, hurt the very consumers that Miliband was seeking to help.

In the shadow general election campaign that we are currently living through, the Tory-led coalition looks to be throwing its free market principles to the wind.

The pay-day lenders are rightly viewed as social pariahs. Nevertheless, it is not much comfort to the investment community that shares in Provident Financial have come under pressure since the Government put forward a capping proposal on pay-day lenders.

The Government’s U-turn on cigarette packaging, with its support for plain packs, may be very sensible in terms of its health impact. But in proposing such a policy they have upset the share price of both Imperial Tobacco and BAT that are – for better or for worse – two stalwarts of the main share indexes in the UK.

The most dramatic new example of government policy immediately changing the investment climate is in the housing market.

It is very desirable that the low interest rate incentives offered by the Funding for Lending scheme are aimed at the small and medium-sized businesses. As we know from Sir Andrew Large’s report on RBS the bank’s publicly declared enthusiasm for SME lending is not matched by the reality.

However, by depriving house buyers of access to cheaper mortgage funding it has managed to send shares in the house building sector down by a whopping 6 per cent and that may just be the start.

The perverse effect of reversing a government intervention is that the firms building new homes will be less well capitalised and may – like the energy companies before them – pull back on new investment projects.

Britain’s short term approach to investment has been the bane of successive governments and most recently was underlined by the Kay review. But when politicians seek to interfere in commerce, all they do is great a less desirable climate for business investment.

Westminster’s daily interference in the markets is hurting investors and investment for myopic political gain.

Toolbox opened

The biggest test for the Financial Policy Committee was always going to be Britain’s housing. The ultimate result of a marketplace where credit is freely available but supply is constricted because of planning limits and timidity among local authorities was always going to be a bubble of some kind.

Wisely the FPC, with the government, has taken its foot off the accelerator by redirecting Funding for Lending towards SMEs.

As importantly the Financial Stability Report has identified a series of further tools for putting the brakes on including tighter underwriting standards, capital restraints on residential lending, recommendations on loan-to-value ratios and loan-to-income ratios and changes in mortgage terms.

All sensible stuff, but it doesn’t answer the acute shortage of supply needed in a country with a surging population.

Woman power

Harriet Green joins the all too small list of impressive women chief executives in the quoted sector. Since taking on the challenge at bombed out travel business Thomas Cook the shares have climbed 689 per cent.

She joins Carolyn McCall, who has transformed easyJet and Angela Ahrendts who rescued Burberry from the chavs and took its market capitalisation to within a whisker of Marks & Spencer.

More please.

The comments below have not been moderated.

"The biggest impact of prospective political interventions so far has been in the energy sector with share prices down an alarming 20 per cent since the Miliband speech promising a price freeze. ". -------------- Well I've just looked at the BG share price and it's shown as increasing by around 7% since Miliband spoke of a 18 month freeze.

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The deflating cushion of north sea oil and gas production plus the too rapid closure of coal fired plant has left Britain more at the mercy of world energy prices. Industrial demand for energy has fallen during the depression, and companies have been unwilling to invest. The carbon policy plus other green initiative like wind farms has increased prices to the domestic user. British consumers are like people in a caravan park where there is only the shop provided by the owner and he/she can charge high prices, because there are no other shops. For all the Coalition's bleat about swapping supplies it is difficult and with the deals are short lived anyway. That Labour allowed this powerful cartel of energy suppliers to hold the country to ransom, while the Lib-Dems taxed the populace with green taxes. Basically none of the main political parties can represent the consumer or electorate. Their ideology prevents it.

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Most politicians suffer from a lack of vision and short termism but Miliband is an unscrupulous idiot.

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Our current political class have little experience of business or indeed the real world from which they are isolated by their expense driven lifestyle providing an almost cocooned unreal existence where the true realities within which ordinary people live are not apparent. Ultimately the real world requires real solutions not the whims and fanciful ideas of politicians which are designed to gain public support in order to achieve their main aim which is to gain or remain in power.

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This is the result of being ruled for the last twenty years by a political class largely ignorant of the economic facts of life.

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