The Analyst: The good times will return eventually

We are now a year into the credit crunch, but I suspect many people in the UK are only hearing about it now. At this stage it might be useful to look at how we got into this mess.

The irony is that the seeds of the credit crunch were sown during a long period of economic growth and stability, which began in the early 1990s. The UK was well placed to be a major beneficiary after we gained freedom from ERM in 1992, and we thrived throughout a long spell of globally low inflation.

However, this stability lulled people into a false sense of security. Gordon Brown's claim to have abolished boom-and-bust would be funny now if the consequences weren't so serious. Our government has effectively maxed out the nation's credit cards, but they weren't the only ones living beyond their means. The banks egged on a property boom and consumers lapped it all up; now everyone is feeling the pinch.

It seems to me that banks periodically misprice risk, in other words they are far too complacent. The average mortgage for a first-time buyer in 1997 was 2.3 times income at a value of £41,800, but by 2007 that had grown to 3.36 times income on an average mortgage of £116,820. Banks had responded to a strong economic climate by making it easier for people to get loans, but worse was to come.

Just when house prices were reaching their zenith, the banks and building societies increased available loans to a staggering six times income. The banks are now reaping what they sowed. So fragile have they become that they are extremely reluctant to lend money to each other, let alone to the man in the street. Consequently, for the first time in ages, consumers are suddenly finding that credit is no longer available. Time will eventually heal the problems, but it may take some years – the public, corporations and government will have to stop spending and start repaying debt.

So what might the future hold? The inflation we have today is due mainly to global influences that are now beginning to dissipate. Falling asset prices and the repayment of debt are significant deflationary factors, so I believe inflation, and interest rates, will fall sharply next year. However, don't expect this to translate into an instant housing market uplift – credit will remain scarce. The good times will come back eventually, but until then we will have to endure a long and difficult hangover for the economy.

Stock markets are somewhat different because they try to anticipate what will happen a year or two down the line. As a consequence of this, the stock market will bottom out before the economy. This is a crucial point that many investors do not appreciate; if you wait for the economic news to improve before buying into the market then you will already have missed a large chunk of the gains.

The crucial question is: when will the market reach the bottom? I can't pretend to know for certain, but it could happen over the next few months. Things will start looking up once the market feels that inflation will slow and therefore interest rates can fall; as I said earlier, I believe this milestone is in sight.

Two especially interesting opportunities are a couple of corporate bond funds: M&G Optimal Income and Artemis Strategic Bond. They have the flexible mandates and skilled managers to make the best of the opportunities in a changing fixed interest market.

Knowing what to do with equities is a tough job at present, so leave it to the experts. Philip Gibbs is one of the very best and is currently very defensively positioned in his Jupiter Financial Opportunities Fund. Another top manager is Neil Woodford, who runs the Invesco Perpetual Income Fund, and has the confidence and experience to take a truly long term view of markets. I'd back either of them to make sound decisions and navigate investors through these turbulent waters.

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

A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
Richard Dawkins dedicated his book 'The Greatest Show on Earth' to Josh Timonen
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Dinosaurs Unleashed at the Eden Project
Arts and Entertainment
Life and Style
This month marks the 20th anniversary of the first online sale
techDespite a host of other online auction sites and fierce competition from Amazon, eBay is still the most popular e-commerce site in the UK
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

    Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

    £45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

    Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

    Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

    AIFMD Business Analyst / Consultant - Investment Management

    £450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

    Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

    £450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
    eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

    eBay's enduring appeal

    The online auction site is still the UK's most popular e-commerce site
    Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

    'Lack of ethnic minority and black faces on TV is weird'

    Culture Minister Ed Vaizey calls for immediate action to address the problem
    Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

    Magic circles: Artist Olafur Eliasson

    Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
    Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

    Josephine Dickinson: 'How I discovered a new world of sound'

    After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
    Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

    Greggs gives lesson in crisis management

    After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
    Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

    Matthew McConaughey sings the praises of bumbags

    Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
    7 best quadcopters and drones

    Flying fun: 7 best quadcopters and drones

    From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
    Andy Murray: I quit while I’m ahead too often

    Andy Murray: I quit while I’m ahead too often

    British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home