Mark Dampier: Double dip or not, buy bonds and blue chips

The Analyst

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