Mark Dampier: Interest rate rise would spell economic disaster
Saturday 29 January 2011
Many column inches have been devoted to inflation and interest rates during the last couple of weeks. With inflation above target for such a long time, pressure is growing on the Bank of England to consider an interest rate rise. According to Neil Woodford, manager of Invesco Perpetual Income and High Income, two of the largest funds in the country, this would be a big mistake. He points out a high oil price of $90 a barrel has a big impact on the UK, but in the longer term it has a deflationary rather than inflationary effect. Non-discretionary inflation effectively acts as an extra tax, depressing demand. He believes an interest rate rise would be disastrous for an economy where there is little sign of wage increases and consumers are faced with utility bill rises of 25 per cent or more in the next five to seven years. I agree it is hard to see how the UK consumer would cope with higher mortgage rates on top of everything else.
Mr Woodford also believes the current fashion for commodity investments of various sorts has gone too far. In his view, quantitative easing is not necessarily helping the developed world because much of the extra money created leaks out into the developing world causing inflation, which is eventually exported back to the West in higher prices for goods. Yet with emerging markets raising interest rates to control their own inflation, it is quite possible demand for commodities will ease. If so, investments in this area could be vulnerable and this would, of course, be favourable for Mr Woodford's relative performance. Being an income fund manager there are few mining stocks he can buy because they tend to yield very little – plus he strongly believes the sector as a whole is overvalued.
Instead, he sees better prospects in more defensive tobacco and food retail stocks, but his real enthusiasm is towards pharmaceuticals and two of his largest holdings are GlaxoSmithKline and AstraZeneca. He describes current valuations as "insane", dismissing the challenges posed by changes in regulation making it tougher for companies to get approval for drugs. His view is that all businesses have challenges right now and, with attractive valuations plus spending on healthcare set to rise due to aging populations globally, the pharmaceuticals sector looks appealing.
The market remains sceptical, however, and pharmaceuticals stocks continue to be out of favour. Glaxo, for instance, languishes at a similar share price to 14 years ago and yields around five per cent. In particular, research and development spending is frequently seen as a costly drain on resources likely to produce little return. Yet this could be some way from the truth, and Mr Woodford believes the true value of these companies is way above the current price. He expects the gap to close in the next few years and if he is right it should mean some excellent returns for investors.
Although often portrayed as a doom-monger due to his bearish macro-economic views, Mr Woodford remains extremely upbeat about the prospects for the holdings in his own portfolio, which he believes should remain resilient amid the problems we face. The main one, as I have said on a number of occasions, is debt, and all the possible solutions to it are uncomfortable. Writing off debt is painful to the fragile banking sector and paying it back (by spending less) means standards of living fall. Politicians keep hoping to kick the can farther down the road but as Mr Woodford says, the can is getting heavier the longer they delay.
While Mr Woodford's funds have made positive returns over the last couple of years, his aversion to mining and energy stocks has weighed on performance, and they have lagged behind others in the sector. There is no way I would write him off though. He remains as passionate as ever and only invests personally in his own funds – a sure-fire way of aligning a fund manager's interest with that of his investors. I certainly share his confidence that he will see them through the potentially challenging times ahead.
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
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
Buying property overseas? Check out these hotspots
Questions of Cash: 'Our dividends seem to have disappeared when TSB was bought and then born again'
Mark Dampier: 'Masterly inactivity - the case for sticking with smaller firms'
My Tinder date asked for a refund when I declined a second meet up
The most expensive cities in the world 2015
- 1 Caitlyn Jenner car crash: Driver who died in collision sued by surviving passengers for $18.5m
- 2 Pictures show young Palestinian girl biting Israeli soldier trying to detain boy during West Bank protests
- 3 Watch the Supermoon live: How to see the brightest Moon of the year tonight
- 4 Blood Moon and Supermoon: September to bring brightest – and dimmest – full Moon of the year on same night
- 5 The 20 toughest job interview questions in the world
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
'Women only' train carriages: Jeremy Corbyn unveils radical move to tackle public harassment
Black holes are a passage to another universe, says Stephen Hawking
Iain Duncan Smith 'should resign over disability benefit death figures', says Jeremy Corbyn
Stock up on canned food for stock market crash, warns former Gordon Brown adviser
Labour leadership: Jeremy Corbyn voters most likely to believe 'world is controlled by a secretive elite'
iJobs Money & Business
£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...
£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...
£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...
£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...
Day In a Page
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
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.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
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.
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 first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
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.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
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.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
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.