By Dawid Konotey-Ahulu
This year’s cinematic visual stunner is Life of Pi. Published in 2001, Yann Martel’s extraordinary book was generally regarded as too demanding, technically, to portray on the big screen. A ferocious Bengal tiger in a lifeboat for most of the story?
Well, legendary film director Ang Lee is always up for a challenge and in Pi he does not disappoint. Early on, a huge cargo ship founders in wild, heavy seas directly above the Mariana Trench, the deepest point on earth – an incredible 6.83 miles below the surface of the western South Pacific Ocean. Ang Lee vividly portrays the confusion and terror of a boy awaking in the dead of night, on a roaring, heaving ocean, to the terrifying realisation that in a few minutes he will go down with the ship.
The UK and, wider, the major European economies are sailing directly above the Mariana Trench in rough seas. That doesn’t mean they’re going to sink, but they might. After the Global Financial Crisis (GFC) of 2008 it is manifestly obvious that seriously bad and uncontainable outcomes are real possibilities. Increasingly, the prevailing view is that we are sailing out of the GFC into calmer waters; shipwreck has been averted. But the truth is no-one really knows if that is true. Greece, Spain, Italy, Portugal are definitely still in choppy, shark-infested waters at best and still directly above the Trench, at worst.
The UK is also sailing somewhere in the western South Pacific, and the credit rating downgrade from Aaa to Aa1 by rating agency Moody’s is an official reminder to the ship’s captain (one George Osborne) that he is on the bridge of a supertanker that might yet go down. Of course, an Aa1 rating is still a robust certificate of seaworthiness but, then, Titanic had one of those.
My clients have sought my views on whether all this means they should consider reducing their exposure to UK government debt (which they hold in the form of fixed and inflation-linked gilts).
Put simply, the answer is “no”. If the economic storm deteriorates sufficiently to sink the UK, it is unlikely to leave our bellwether corporations unscathed. Should the UK be unable to meet its debt obligations as they fall due, the odds are that debt issued by UK-based borrowers will be in an equally sorry state, and almost certainly worse. Think about it. The supertanker goes down in the middle of the stormy night and the flotilla of accompanying small boats emerges untouched, safe and sound? No matter how bad the storm, you will probably fare better on board the supertanker.
Although corporate debt should sit alongside your gilts within the pension scheme’s fixed income allocation, it’s not a substitute for (even recently downgraded) government debt. All that said, there are a few reasons you could consider replacing some of your gilts. One might be that due to never having got around to de-risking your scheme now requires a higher investment return than you can achieve from gilts. Without that higher return, pension benefits probably won’t get paid out in full to your scheme members.
Another, is that gilts are the most liquid of debt instruments and your pension scheme may be able to forego that level of super-liquidity. Thus, less-liquid assets that pay more (due to their illiquidity rather than their additional risk) could be considered in those circumstances. But if you just want to hold the least risky, most liquid assets available, and if, because you did de-risk, you don’t need to go hunting for higher returns then in my view your gilts still remain the safest haven.
Although, of course, we may yet all find ourselves at the bottom of the Mariana Trench.
Dawid Konotey-Ahulu is founder and co-CEO of Redington
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