The Analyst: The good times will return eventually
Saturday 30 August 2008
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 www.h-l.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 British tourists 'murdered' in Thailand: Pair's bloodied bodies found naked on Koh Tao beach
- 2 Vivienne Westwood says 'Yes' to Scottish Independence by declaring: 'I hate England'
- 3 Welcome to Cameroon, where drinking Baileys can lead to imprisonment
- 4 Lego breaks out of the toy box and heads for the gallery
- 5 Vogue under fire for 'Big Booty' article
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
£23m Birmingham cycle scheme is attacked by Tory councillor for not catering to the elderly
Salmond accused of laughing off national debt with ‘what are they going to do: invade?’ joke
iJobs Money & Business
£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
£35000 - £38000 per annum + Benefits: Ashdown Group: Training Coordinator / Pl...
Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)
£400 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...
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