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
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 2 Disney heiress Abigail disowns her share of family profits in West Bank company
- 3 The secret report that helps Israel hide facts
- 4 'Women should not laugh in public,' says Turkey's Deputy Prime Minister in morality speech
- 5 Israel's propaganda machine is finally starting to misfire
The secret report that helps Israel hide facts
Woman and two children killed by mob in riots over 'blasphemous' Facebook post in Pakistan
A day in the life of Vladimir Putin: The dictator in his labyrinth
Putin is 'thuggish, dishonest and reckless', says British ambassador to US
Richard Dawkins tweets: 'Date rape is bad, stranger rape is worse'
Boozy, ignorant, intolerant, but very polite – Britain as others see us
- < Previous
- Next >
iJobs Money & Business
£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...
£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...
£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...
£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...
Day In a Page
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
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000