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; request a free guide on NISAs from Hargreaves Lansdown
How couples can protect their financial interests when cohabiting
Money alert: Overdrafts at HSBC and First Direct
'Dismal' eurozone data sparks concerns
How to protect your assets if the stock markets begin to head south again
Child Maintenance Service to replace Child Support Agency - but is it better?
- 1 Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
- 2 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 3 James Foley beheading: Fox news presenter Megyn Kelly annoyed by Ferguson update during broadcast about murdered journalist
- 4 Kajieme Powell: Missouri police release video footage of second man killed by officers
- 5 Paul Scholes: Manchester United need five experienced players who can turn round a desperate situation
Scottish independence: English people overwhelmingly want Scotland to stay in the UK
Richard Dawkins on babies with Down Syndrome: 'Abort it and try again – it would be immoral to bring it into the world'
Isis threat: Cameron wants an alliance with Iran
Crisis? What crisis? A visiting US doctor gives the NHS a rave review
Michael Brown shooting: Chaos erupts on the streets of Ferguson after autopsy shows teenager was shot six times – twice in the head
Scottish Independence Referendum: Salmond described as 'arrogant, ambitious and dishonest' by Scottish women
iJobs Money & Business
£1 per annum: Harrington Starr: JQuery Developer JQuery, UI, Tomcat, Java - Tr...
£1 per annum: Harrington Starr: Web Developer (JQuery, UI, Tomcat, Java)- Trad...
£30000 - £35000 per annum: Harrington Starr: VB Developer (VB, VB.Net, VB Deve...
£55000 - £65000 per annum: Harrington Starr: A Global Financial Service Organi...
Day In a Page
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
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony