Mark Dampier: Double dip or not, buy bonds and blue chips
Saturday 04 September 2010
This week I thought I would depart from the usual fund review and look at the wider economic picture and its implications for markets. Since the start of August concerns about a double-dip recession have come to the fore, largely because of deteriorating economic data in the US. The debate over whether this will happen is currently raging in financial circles, and the answer has huge consequences for investors.
I'm afraid I have no level of certainty as to whether the double dip will happen or not, and the debate may continue for some time. However, there is little doubt in my mind that Western economies are in for a long grind, and a period of weak growth may be the best we can hope for. For many people, of course, the past 18 months or so hasn't felt so bad. Indeed, for those who haven't lost their jobs the recession has probably passed by unnoticed, and if you have a variable rate mortgage you are probably hundreds of pounds a month better off. Unfortunately, things cannot change for the better from here. Interest rates won't fall any further from their current low and, with wages falling and taxes rising, life is going to get more uncomfortable.
Given this scenario it is hardly a surprise that we have seen a huge bond rally in the past few weeks. Ten-year gilts are at historic lows of 2.8 per cent and investors are even talking about a bond bubble. This is overblown. A bubble would be signalled by frenzied bond buying by all types of investors. Looking at the markets today I don't see this. More plausible is that given the deteriorating background, momentum investors (possibly hedge funds) have made up their mind that the US Federal Reserve and the Bank of England are going to make further rounds of quantitative easing. If they are right and there is more QE to come, there could be a flurry of government bond buying. What they are aiming to do is get in ahead of other investors and make a quick profit.
From an investor's point of view I believe interest rates are going to stay low for a long time. Therefore I remain a buyer of corporate bonds as well as what I might term "high-quality" high-yield bonds. These are paying a far superior yield than government gilts and, as long as defaults remain low, they should provide good returns – so long as we don't slip into a deep recession that causes a significant number of companies to default. Two excellent funds to take advantage are Invesco Perpetual Tactical Bond and Jupiter Strategic Bond, both of which have a high degree of flexibility to change the types of bonds they hold.
For equities, a fresh bout of QE would probably send the markets higher, but until we get a clearer view of the prevailing macro-economic data, markets are being held to ransom. One thing I am sure of is that there are no quick fixes to the problems faced by Western economies.
While politicians might like to have a quick fix, the only real solution is time. The hangover of debt governments and consumers are facing after spending recklessly in the Noughties can be cured only through hard graft to repay debt. Until this is done we can't go back to pre-2008 consumption levels.
What other investments are suitable for this era of financial rehabilitation? In a world of low interest rates the income on offer from large, well-managed blue-chip companies stands out as a remarkable opportunity, so the case for equity income funds such as Adrian Frost's Artemis Income is strong.
I also want some wise heads looking after the core of my portfolio, and here I would single out Phillip Gibbs's Jupiter Absolute Return Fund and William Littlewood's Artemis Strategic Assets Fund as flexible mandates well equipped to cope with the rigours of the next few years. They can invest in a range of different assets and can employ techniques that make money in falling markets as well as rising ones.
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.h-l.co.uk/independent
- 1 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 2 Mystery man who gave mum heart-warming note on train 'wanted to put a smile on her face'
- 3 Michelle Obama highlights harsh restrictions faced by Saudi women after meeting King Salman without wearing a headscarf
- 4 Mafia's wall of silence broken: Victim of Cosa Nostra's extortion rackets in its Corleone heartland co-operates with authorities for the first time ever
- 5 Amal Clooney gives excellent answer to fashion question at European Court of Human Rights
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
iJobs Money & Business
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...
Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...
£16500 - £16640 per annum: Recruitment Genius: This fast growing Finance compa...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village