Scanning the financial horizon


Heather Lamont looks at a few recent headlines from the financial press and considers what they might mean for your charity’s finances.

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21st February 2018 by TFN Guest 0 Comments

Several newspaper headlines in the financial press have jumped out at me recently because while it may not look like it on the suface, they could have implications for charities.

"Oil price recovery boosts sector profits"

Is anyone pleased when the price of a barrel of oil goes up? This will generally mean higher transport costs and energy bills, so it’s not good news for most individuals or organisations. Shareholders in oil industry companies, on the other hand, could be cheering as the value of their investment follows the oil price up – but they should be wary of what lies ahead.

Whatever President Trump says, time is running out for traditional carbon-intensive fuels. Well meaning divestment campaigns won’t put fossil fuel companies out of business, but over time, new technologies and greater energy efficiency almost certainly will. Reserves of coal, gas and oil will be devalued to the point where companies cannot profit from these assets, and investing in shares whose value relies on them is a risky long term bet. If your organisation has an investment portfolio, you might want to check how exposed you are.

Heather Lamont

Heather Lamont

"UK ready for rate rise, says senior Bank official"

After years at close to zero, the official interest rate set by the Bank of England is finally rising as policy makers aim to keep a lid on the inflation that they believe may be taking hold.

Let’s not get carried away – the UK economy is hardly at risk of growing too fast, so we shouldn’t expect a return to the rates of 5% and above that we saw before the last recession. Nevertheless, a gradual climb to 1.5% or 2% from the current 0.5% would be noticed.

Borrowers including the government, businesses and millions of households will have to spend more to service their debts, leaving less to spend on other things. This could increase the funding challenge already faced by many voluntary organisations, and put some charities’ beneficiaries under additional financial pressure.

On the plus side, higher interest rates will tend to reduce the scale of future liabilities faced by final-salary pension schemes, which could be welcome news to third sector organisations struggling with pension deficits.

Meanwhile savers, including many charities, could receive a welcome if modest increase in the interest they can get on cash in the bank. But rising rates aren’t any help if you’re locked into a deposit that’s giving you less interest than the market’s now offering – so be careful with long term deposits at fixed rates.

"Global stock markets suffer record falls"

For the first time in a good couple of years, we were reminded in February that the value of investments can fall as well as rise as share prices in the major markets fell by 10% or more. This will have hit many charities’ portfolios. If that’s you, should you be worried – was this the start of something much worse?

It’s never comfortable to see the value of balance sheet assets go down. But you can’t expect your portfolio to generate a decent income stream and maintain its real spending power over the long term if it doesn’t consist mainly of equities and other assets that can go up and down in price.

For now, economic growth in all the major economies is progressing nicely. Companies should be able to continue generating profits and making returns for investors. The recent retreat in share prices looks more like a reminder, after an extended period of gains with very little pain, that volatility is something investors should be prepared to tolerate if they require strong long term returns.

Heather Lamont is a client investment director at CCLA. She will be discussing the implications of economic and financial markets news in her workshop Eyes on the Horizon at The Gathering 2018 on Wednesday 21st and Thursday 22nd February.