BLOG:Investors are looking in the wrong places for returns

Written by:
Five years on and the financial crisis shows no sign of ending. But many investors, understandably fearing the prospect of further shocks, are looking in all the wrong places, says Tim Price, investment director at PFP Wealth Management.
BLOG:Investors are looking in the wrong places for returns

The critical problem of our time remains one of too much debt. There is more debt in the world than can ever realistically be serviced, let alone paid back in full.

The western economies have gone conclusively ex-growth, and austerity is now sitting uncomfortably with an electorate across Europe used to entitlement and that shows no special enthusiasm for higher taxes and lower government spending.

Thanks to the absurdity of the benchmarks involved, institutional fund managers and pension schemes have crowded into objectively one of the most unattractive and risky assets out there: UK (and, to be fair, also US) government debt.

There is something particularly grotesque about seeking safety in conventional gilts.

They yield next to nothing for a kick-off. More to the point, though, they offer investors unique threats to their wealth: the combination of currency risk and inflation risk.

Five year gilts, for example, yield markedly less than 1% to maturity. Official inflation is already running at more than twice that level.

State-sanctioned inflationism (money printing, if you prefer) also happens to be the only policy tool left in the Bank of England’s box. It is a racing certainty that the pound will continue to be devalued by a monetary administration devoid of ideas.

The only question in my mind is whether a colossal meltdown in the gilt market is accompanied, pre-empted, or followed by a sterling currency crisis.

Corporate debt is no palliative either. Corporate yields have been dragged down in line with the bull market in gilts – and corporate paper offers extra credit risk to boot.

But apparently “safe” stocks are also no solution. The stock market is unlikely to survive a rout in the government bond market entirely unscathed.

So what’s the solution?

In my view, extraordinary economic circumstances require unorthodox investment responses.

The true safe havens in the bond market are the road less travelled: objectively high quality credit issued by genuinely wealthy countries (the likes of Hong Kong, Singapore, Qatar, the UAE, etc). The same goes for their currencies.

Truly defensive equities (defined by both sector and valuation) have a role to play.

So too does gold and silver – real money that cannot be printed at will by desperate governments and Treasuries.

But as for gilts – they are a gigantic accident waiting to happen. So it is rather a shame that pension funds now hold more debt than they have ever done over the past half century.

Tag Box




Financial fitness

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Which ISA is right for you? A round up of the six products available in 2017

From cash to innovative finance to lifetime, here's our guide to the ISA products available to savers this yea...

Guide to buy-to-let tax changes

In late 2015, former Chancellor George Osborne announced a range of  tax measures aimed at landlords, which t...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Five fund tips for a 0.25% interest rate environment

With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are ...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

Read previous post:
HMRC targets directors of UK’s biggest firms

HM Revenue and Customs (HMRC) is pursuing the directors and senior executives of the UK's largest companies for underpaid taxes.