Interest rates could stay static for four years

Simon's Market View

In mid September 2008, Lehman Brothers filed for bankruptcy, and the world changed. Two years on we are still unsure quite what will be affected and by how much. One thing we do know is that the current Government has decided to pay back the debt caused by quantative easing (pouring money into the economy by shoring up the reserves of the banking sector) as quickly as possible. This has meant a number of austerity measures being announced, which will impact not just the public sector but pretty well everyone.

So, how will this effect investments?

Equities (Stocks & Shares)

The first ten years of this century have been a rollercoaster ride for equities. As I write, the FTSE 100 (the index of the 100 largest companies in the UK) is still over 11% lower than it was ten years ago. However, if you invested at the right time you will still show a profit.

Many feel this could be the decade of equities. Dividend yields (income) sit far above cash interest rates and even above the return on gilts. It is the only real option for those seeking a rising income to beat inflation.

Cash

I feel interest rates of 0.5% are here to stay for some time. A recent projection from Ernst & Young saw them at this level for the next 4 years. With the threat to economic recovery more likely to be deflation than inflation. I tend to agree with them. A cynic may argue that the Government might be quite happy to see a degree of higher inflation, as this will have the effect of making our debts relatively smaller.

Property

Commercial property saw something of a recovery as investors saw an appealing yield, up to 7% for quality property with quality leases. Some of the shine seems to have come off of this asset class recently, with fears that a “double dip” recession could drive values lower.

Residential property has been remarkably resilient, but recent figures have shown that prices are falling again. The likely loss of jobs in the Public Sector can only have the effect of putting more downward pressure on prices. There will be a call for rental property, but my feeling is that this should be left to the professional landlord, who is working more for a regular income return than capital growth.

Fixed Interest

Gilts look poor value at present, with the income yield below what can be achieved with a moderate equity portfolio. We tend to prefer using strategic bond funds for our fixed interest exposure, as experienced managers can then move money between the various bond sectors from gilts to high yield. This way, we have a better chance of maximising the opportunities in this area, and obtaining a better income, and overall return for clients.

Alternative Investments (Absolute Return Investing)

This is becoming more popular as investors look for alternatives to the traditional long term investments. The problem is sorting out which investments are high risk and which are low risk. At Furley Financial we would normally, unless asked specifically, only use low risk funds. Many of theses funds reduce risk by insuring the market on the downside as well as the upside. They are increasingly forming a larger part of our investment strategies.

Conclusion

Markets will remain volatile of course, but equities still seem to be the best value of the major asset classes at present. Provided clients are prepared to take an element of risk, reasonable income can still be generated from a balanced portfolio, with the prospect of your capital and income beating inflation over the medium to long term. Compare that to holding money on deposit, where interest rates are not currently beating inflation and therefore impacting on the real value of the capital invested.

For further information on investments contact Simon Ludden, Financial Planning Manager, on 01227 763939.