Mark Dampier: Your best defence against inflation

The Analyst

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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

    £40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

    Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

    £45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

    Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

    $125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Day In a Page

    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas
    La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

    Deaf community outraged by La Famille Bélier

    The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
    10 best high-end laptops

    10 best high-end laptops

    From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
    Susie Wolff: A driving force in battle for equality behind the wheel

    Susie Wolff: A driving force in battle for equality behind the wheel

    The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
    Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

    'No abs Adam' plans to muscle in on Usain Bolt's turf

    After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
    Calls for a military mental health 'quality mark'

    Homeless Veterans campaign

    Expert calls for military mental health 'quality mark'
    Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

    Meet Racton Man

    Analysis shows famous skeleton was a 6ft Bronze Age superman
    Garden Bridge: St Paul’s adds to £175m project’s troubled waters

    Garden Bridge

    St Paul’s adds to £175m project’s troubled waters
    Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

    Stuff your own Christmas mouse ornament

    An evening class in taxidermy with a festive feel
    Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

    Joint Enterprise

    The legal doctrine which critics say has caused hundreds of miscarriages of justice
    Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

    Freud and Eros

    Love, Lust and Longing at the Freud Museum