Mark Dampier: Your best defence against inflation
Saturday 14 November 2009
While the controversy around bankers' bonuses is dominating the financial news, a far more important question is in danger of being overlooked. Should we be worried about inflation or deflation?
There are good arguments on both sides, but as each scenario requires very different portfolios, it is an issue that needs careful consideration.
Although they won't admit it, the Government would probably like to see higher inflation – it's the easiest way for them to decrease the value of their crippling debts – and history suggests that this is the most likely outcome. This could cause problems; it is notoriously difficult to keep a lid on rising inflation, and the best method of doing so (raising interest rates) is tough when the economy is weak.
Indeed, with our economy still in the doldrums and unemployment likely to continue rising, we have to consider deflation as a serious risk also, and recent months have seen moves towards deflation.
One of the asset classes most susceptible to inflation is bonds, so I was especially interested to speak to James Foster this week. He manages the Artemis Strategic Bond Fund, which has made a dramatic recovery since the lows of 2008. He agrees that there is little evidence yet of real inflation. There is no demand in the economy, wage growth is at its lowest for years, and unemployment is still rising. There may well be a blip in inflation as we see rises in VAT, petrol prices and other energy prices coming through, but even so inflation is likely to fall back again in the second quarter of next year.
However, this does not mean we can forget about inflation, and Mr Foster actually believes we are sitting on a ticking time-bomb. This is based on the fact that we have had a massive monetary stimulus and the Bank of England has been printing money through its quantitative easing programme. What is more, interest rates are at an all-time low and sterling has been depreciating.
Mr Foster's view is that inflation will be much more of a problem by 2011, and the transition to higher inflation will be painful. It could be bad news for bonds, gilts and shares alike.
So what has Mr Foster been doing? Until recently he has been "shorting" the gilt market, which has broadly been the right thing to do. He has halted this strategy more recently as he expects gilts to rally over the next two or three months. He is also relatively negative on investment grade corporate bonds (at least those outside the financial sector) as they now yield little more than gilts and he doesn't see great value there.
Fortunately, the flexible mandate of his Strategic Bond Fund means he does have some weapons to help investors through this difficult time. As I have said, he can take "short" positions as well as use floating rate notes, which offer a better yield if interest rates rise without a corresponding fall in capital value.
He has some 30 per cent of the fund in high yield bonds, with his biggest weighting in the financial sector, which he still believes is undervalued. Although he admits that defaults will rise within the high yield sector, investors are still being compensated by a very attractive yield, and he believes the risks are worth the potential reward.
Generally speaking corporate bonds have enjoyed a fantastic 2009, but of course that must be set against a terrible year in 2008. Nevertheless most investors should be sitting on a profit now.
The dramatic rises in corporate bonds seen in 2009 are highly unlikely to be repeated next year, although the income remains attractive, so the sector should still appeal to many investors. Perhaps strategic bond funds, with their greater flexibility, could be best placed for an uncertain market in 2010. Other options for an increased income include the UK Equity Income sector. As I have said in previous columns, defensive shares and larger blue chips companies have on the whole been left behind.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
Donald MacInnes: 'I have to have £500 a month spare from now until at least 2035'
HSBC becomes first bank to offer five-year fixed rate mortgage with interest rate under 2%
Pension freedoms: How to deal with cold calls from scammers
Wonga results could get even worse this year, chief admits
Barclays new Blue Rewards hands cash to customers. What’s the catch?
- 1 Gwyneth Paltrow and Chris Martin file for divorce after 10 years of marriage
- 2 Rarest Beanie Baby bought for just £10 at car boot sale could be sold for £62,500 on eBay
- 4 Bookies now say Ed Miliband is more likely to be prime minister than David Cameron
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
Katie Hopkins on LBC: Listen to caller taking The Sun columnist to task over migrant comments
iJobs Money & Business
£12000 - £15000 per annum: Recruitment Genius: An expanding Insurance Brokerag...
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
Day In a Page
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 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.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
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.
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.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
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.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
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.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
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
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
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 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
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000