Mark Dampier: Bond moves underline need for vigilance in portfolios
Saturday 22 September 2012
Both the US Federal Reserve and the European Central Bank (ECB) have surpassed market expectations with their latest policy announcements. In an extension to the Fed's quantitative easing (QE) programme, its chairman, Ben Bernanke, pledged to purchase $40bn (£24bn) of mortgage-backed bonds per month, continuing indefinitely until the outlook for the US job market improves.
In focusing on mortgage-backed bonds, Mr Bernanke is attempting to buy up poor loans from banks made to homeowners in better times. On top of this, he extended the promise to keep interest rates close to zero until at least mid-2015.
The open-ended nature of this commitment draws comparison with ECB president Mario Draghi's pledge earlier this month to keep government bond yields at a manageable level with unlimited purchases, provided governments ask for assistance.
Not surprisingly, markets have responded positively to both announcements. The possibility of a euro break-up has been pushed significantly into the future (though not eliminated entirely). Note that Mr Draghi's plan did not include Greece, which will undoubtedly need yet another bailout. Some have suggested that he has assumed Greece would exit at some stage and concentrated on erecting a firewall around the larger economies most at risk from contagion.
No one knows for sure what the long-term effects of QE might be, but in the short term the consequence is that stock markets are experiencing a "risk-on" rally. Defensive shares such as utilities, tobacco and healthcare have fallen, while cyclical shares, typically commodities and gold, have risen significantly.
Central banks are effectively forcing investors out of cash (which yields virtually zero) into more risky investments. To me, the irony of the situation is that as investors worry about inflation they buy commodities, which then causes inflation, directly affecting the very consumers these central banks are trying to help. Since June, the price of oil has risen 30 per cent. I am sure you have noticed that the price of a litre of petrol is up around 10p. So while QE might provide a sugar rush to the markets, I remain unconvinced of its benefits in the real economy.
The US economy actually seems to be improving, but I think this latest round of QE confirms the desire to keep the present, debt-laden system going, rather than addressing the structural problems of too much debt. The danger seems clear that in doing so the Federal Reserve could be inflating another credit bubble.
Those looking for signs of problems should watch the US, German and UK Government bond markets for warning signs. These will be particularly sensitive to long-term inflation worries and currency debasement. For instance, 10-year gilt yields have risen from 1.75 per cent to 1.9 per cent over the past week or so, but I think this is more a reflection of short-term profit-taking and some moves into Spanish and Italian debt. It is far too early to say that gilts have broken out of their recent trading range.
So what should investors do? There is no simple answer, but these announcements highlight the need for greater vigilance in your own portfolios and their asset mix. I still believe high-yielding shares offer excellent value against a background of continued low interest rates, and therefore equity income funds are worthy of consideration. As I have mentioned before, the more economically sensitive exposure of Clive Beagles' JO Hambro UK Equity Income dovetails nicely with Neil Woodford's more defensively positioned Invesco Perpetual Income.
Gold is often cited as an area which should benefit from QE. Its price has risen more than $150 in the past few weeks, but it could have much further to run. Two easy ways to gain exposure are via an exchange-traded fund, or via a fund investing in gold mining shares, such as BlackRock Gold & General.
Finally, it is worth remembering that notwithstanding the boost provided by central banks, markets are not without risk. Geopolitical risk in particular is ever-present – I wonder how long Israel will allow Iran to continue building its nuclear programme? Should the situation flare up, we would see the price of oil skyrocket – something the global economy does not need at present.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Buyers beware of new-build home headaches
Dirty tricks in a divorce can cause some nasty surprises
Simon Read: 'Taylor Swift tickets purchased on Viagogo were cancelled hours before the concert'
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
- 1 Isis propaganda video shows 25 Syrian soldiers executed by teenage militants in Palmyra
- 2 Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
- 3 Optical illusion turns blue demon into brunette
- 4 Right to die: Belgian doctors rule depressed 24-year-old woman has right to end her life
- 5 The biggest first date turnoff has been revealed
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
Sickness and disability benefits could be reduced by £30 a week as part of £12bn welfare cuts
iJobs Money & Business
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
Day In a Page
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.