FINANCIAL SPRING CLEAN – Reviewing your treasures

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Welcome to March. The cold days of deep mid-winter are behind us; although of course, in these Mediterranean climes, “cold” is a relative term. And whilst we may have seen snow in unexpected places very near Gibraltar, I think it is safe to say that we will have to wait another year for a chance to use our toboggans on the slopes of the Rock. The days are noticeably lengthening and we can start to anticipate the long, warm summer ahead – even if it is not exactly right around the corner.

In common with our friends in colder climes, the urge to do a bit of “spring cleaning” generally makes its presence felt at this time every year. However, I’m sure I’m not alone when I survey my ever increasing clutter (my “treasures” as I unwisely refer to them) and somehow find an excuse – any excuse – to defer action. And by then, of course, summer is upon us and it’s too late and the clear out must await another year. So, how about considering some financial good housekeeping instead?

Where to start? We are reminded regularly that levels of personal debt across the world remain dangerously high. The figures are staggering and, in some cases, indebtedness is even higher than before the onset of the financial crisis in 2008. Do not fear, dear reader, as one who is by nature a spender rather than a saver, I’m not going to pontificate about the urgent need to reduce your borrowing. In any case, I have always treated such advice with caution. After all, if it were that easy to reduce debt, everyone would surely do it.

Granted, there are ways to reduce the costs of borrowing, but debt is debt; one cannot just make money appear out of thin air. There is one exception – my good friend and local magician Jamie Zammitt, who can indeed transform a five-pound note into a crisp twenty before one’s very eyes. But with apologies to Jamie, the alchemy he performs might not cut it with your bank manager.

Leaving magic solutions where they belong, the first thing to consider in a financial spring clean would (I suggest) be to look at the simple stuff first. Few of us are able to follow Polonius’ advice in Shakespeare’s Hamlet, where he advises his son “neither a borrower nor a lender be”. Therefore interest rates are indeed of interest to us all.

Most financial pundits consider that the next move in interest rates will be upwards. You may remember that they thought that in the UK – and therefore in Gibraltar too – last year too. Then, 23rd June happened. Interest rates could in theory fall still further. A more likely scenario is that they do not, but that inflation rises markedly (albeit from a very low starting point). The prospect looms that negative “real” returns will become the norm, i.e. after inflation is taken into account. That is fine if you are borrowing but not at all attractive if you are a saver. The spring clean question is to consider your own “tolerance” for interest rate movements. The obvious concern for most is the effect on mortgage payments and, whilst individual situations will vary, we should all take heed.

Banks are keen to provide advice on mortgage deals and there are several options available. The spring clean might include considering whether your current deal remains the best option. There are pros and cons between fixed rates or some form of floating arrangement. One could simply relax, elect the simplest solution and take a chance with the market. By doing so, one might avoid the arrangement fees that come with the more bespoke alternatives – but you are likely to follow the Bank of England’s monthly interest rate decisions rather more closely.

Another factor in our spring clean is to consider the impact of a volatile exchange rate. Here in Gibraltar we are particularly interested in sterling’s performance against the euro. Most of us have some “currency exposure”, as the City types would call it. This is true of any country bordering another using a different currency. The issue is more acute locally because the Gibraltar government is powerless when it comes to setting interest rates and is therefore at the mercy of the currency markets. To gain some idea of the financial impact of the latter, just consider than in the last twelve months, the pound has yo-yoed between a low of just less than €1.10 and a high of just over €1.30.

This is unquestionably good news for exporters, right? By “exporters”, I include all those in Gibraltar who sell things whether physical goods or services. It follows that goods or services we sell to foreign buyers will be cheaper in foreign currency terms today than a few months back. However, we don’t produce much locally – with some notable exceptions such as my good friends at Gibraltar Crystal – and if the raw materials needed to produce the goods are themselves imported from abroad, those costs will have risen in sterling terms. So the net overall picture may not be as rosy as one might imagine. Again, every case will be different but the message is to consider the impact a fluctuating rate may continue to exert on your own finances or business.

For anyone with an investment portfolio, this might be a good time to reflect on the wider picture. Far more qualified commentators than your humble scribe are pretty much agreed that 2017 and beyond is packed with unknowns. Brexit and other uncertainties fizzle around the EU – the eye-wateringly high debt pile in Italy, continued problems in Greece, which is renegotiating its own debt (again), and elections in several countries, not least the Netherlands, France and Germany.

Another consideration is, of course, the new “free radical” that may – if you’ll pardon the pun – trump them all. And what reactions will he provoke in Brussels, Beijing and Moscow. Where does all this leave your investments? Talk to your adviser about the challenges out there. Danger may be lurking or there may be money to be made.

Pension holders are particularly affected by stock market performance. A review of your pension position is highly recommended. Again, there is a seemingly bewildering choice available – especially for any people living in Gibraltar or just across the border in Spain that hold “legacy” pensions from the UK and elsewhere – not just in terms of investment options but in the type of pension you hold. There is a wide range of options out there and this is an area where professional advice is not only recommended (as it almost always is) but also, in some cases, required by law.

The message is that in these uncertain and potentially volatile times, nothing in the financial world is certain and we can take nothing for granted. All we do know is that summer is coming and by then, I am sure, we will all be far too pre-occupied with our preferred ways of enjoying the sun and the long languid days. The time for a spring clean is, well, spring. When we are done with the mops, brushes and bin bags – however half-hearted the effort – taking some time to dust off the financial clutter may be worth far more in the long run. I know I shall be doing so – at least it will assuage my guilt that my physical spring clean is, once again, unlikely to amount to very much. Now, where are those bank statements?