On the first Thursday of this month, European rates were reduced half a point to 2.0% and, typical...
On the first Thursday of this month, European rates were reduced half a point to 2.0% and, typically, Sir Edward George commented on sterling's recent weakness and kept UK rates unchanged. Not for nothing has he earned the sobriquet Steady Eddie.
With the Government need- ing an 80% increase in gilt sales this financial year to fund their deficit, some investors are asking if the bull run in fixed interest investments in the last few years is now over. Has it mirrored the equity bull run of the last few years of the 1990s? Are there signs now of fixed interest markets becoming overextended?
With fixed interest investments still providing a handsome real return, I think not. After all pension fund costs are related to the rate of inflation, and there seems every sense in the Trustees of a mature company pension scheme like the Boots pension fund, which enjoys a surplus, switching into a range of fixed interest investments that will meet pensioners' and future pensioners' anticipated requirements ' thereby saving costs and adding certainty.
April figures for sales of UK corporate bond funds reached record levels. That month they were the best selling sector in the UK with 33% of total net sales of all funds. The total value of UK corporate bond funds is now £19.4bn, an increase of 42% since the start of 2002.
There is a huge appetite for yield, and why not with the Bank of England charged with keeping inflation at 2.5% or so, and gilts yielding 4.0%? After a Budget that increased costs, it is probable that UK inflation is now near its high point for the year.
Equally, UK interest rates are now 1.75% higher than rates on the Continent, and it is highly likely that sterling will steady against the euro, so that the UK base rate can be lowered in the not too distant future. The best guess is that gilts and UK bonds will appreciate further at both the long and the short end.
With tax cuts now being enjoyed in the US and a spending package approved by Congress at the end of last month, commentators suggest that the US equity market is priced for an improved economic outlook. Equally UK equity market ratings suggest that earnings growth will continue to improve. On the other hand these same economists point out US and UK bond markets are on yields that are only justified historically by stagnation or a dismal economic advance.
I would counter such negative analysis by quoting from Roger Bootle's book, The Death of Inflation. He points out cost cutting has provided a good deal of the greater efficiency enjoyed by US and UK companies this decade and by reminding investors that there is no reason both the fixed interest and equity markets should not continue to make progress. They did in the 1990s.
Buying an A, AA or AAA rated corporate bond is such an easy way of receiving a real revenue return in these days of low inflation. Capital appreciation should come. If you buy below par, as I do at Laing & Cruickshank for the Edinburgh Monthly Income Portfolio, capital appreciation is sure to come.
Portfolios committed to fixed interest.
UK economy is growing.
Govt spending set to rise dramatically.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till