So the UK Government has sold the most expensive Gilt since 2007, paying 5.668% till redemption in October 2025. That is significantly higher than the rates which were applying only a few years ago. Unless inflation abates (and wage figures today don’t help) then the cost of servicing the National Debt will rocket and start to become a bigger part of the annual budget.
Other countries across the world are seeing similar pressures. If only the Government had filled its boots with 100-year Gilts paying perhaps 2-3%pa when the demand was so high (or undated Gilts like Consols or War Loan in the old days)… just like Austria did in 2020, paying 2.596%pa. Why are we so reactionary and not more proactive and with high inflation, having so much of our debt linked to such inflation? It doesn’t diminish in real terms like fixed rate debt does…
Higher rates are negative for real assets like residential property and especially because people take the high risk of borrowing against it (homes and buy-to-lets). It seems very low risk when the rates are low and house prices only go upwards but when rates rise and the market stagnates then falls, it is a very different outcome. The first loss is on you, as the lender still wants its full loan repaid.
Economically we have basked in the sun of rising house prices and very low interest rates for too long. These will have caused trouble for too many people who have to pay the bigger bills, typically after their preferential fixed-term rates expire. As the majority of our economy is also dependent on consumption, this knocks confidence and will impact the economy – it might be good to drive-down inflation but are recessions ever ‘good’?
It is a concern, especially as we also now have so much National Debt. Conversely, there are several excellent funds available on the market where an income of up to or over 10%pa is possible going forwards. Whilst we could ‘cry’ and say that is because their capital values have fallen in the short-term, which is true, that income flow arises from the underlying components and which have not changed suddenly, so there is plenty of good news to tuck-away some, even if you show a loss on what you hold already.
Remember the opposite should hold water too – as interest rates fall, then capital values go up as they become more attractive compared to ‘then’ current rates. If all you have are standard Gilts then remember that the Government only pays you £1 for every £1 of loan at the end though so that’s not the same! Of course the other trouble is tradition – investors wanting ‘low risk’ end-up with ‘bonds’ but over the last few months (and since 2021) they have lost more than ‘riskier’ portfolios… (because something paying a ‘guaranteed’ say 4% is not as attractive now with rates at say 6% whereas when rates elsewhere were 2% they seemed very attractive).
Despite a ‘hawkish’ comment from the Fed, the Dollar slipped and Sterling has hit the highest since April last year. That’s almost a fifth stronger than the trough last September.
A strong Pound is good in that we import so much so costs fall and that also means inflation but of course it also makes our exports dearer. That also means that your US investments are down by that sum unless you hedged the risk (we have low exposure there as readers know). Most share funds don’t hedge. Against the Euro, Sterling has also been its highest since last August too but that’s only 5% more. The Dollar was a safe haven bolthole on the Ukrainian war outbreak of course.
So, lacklustre investment reports for yet another quarter are the order of the day. It is really frustrating and our guidance has been to anyone needing funds to endeavour to defer till times are healthier, if they are able to do that, as value is so good now. After all, if it is not time to sell it is time to buy.
We are reminded too that the average discount on Investment Trusts has widened to levels last seen in 2009 so even worse than the pandemic’s lows and all overblown and excessive. Yes, this widening is negative for investors as not only have the markets drifted but the price of the shares investing in the market has fallen further, in effect. This seems an extra risk but it will be transitory – not because I am an eternal optimist (I have to be a realist in this business) but because if the markets themselves do not correct the anomaly, then more Trusts will have wind-up motions and then investors are paid 100% of the underlying assets’ values.
On the present average discount of 18%, in simple terms that means an uplift of 22%. Of course, within this ‘range’ there are Trusts on premia and some on exceedingly wide discounts and they are the ones more likely to succumb to corporate activity to unlock that pricing aberration. However, short term it does mean that investors and managers who like closed-ended funds, like us, suffer more than open-ended funds but that is an opportunity and not a reason to sell-up at the wrong time.
Apparently there is £1.8trillion sitting idle in cash accounts here – the equivalent of the whole of the FTSE100. Just imagine what would happen to prices if even a smidgen of that cash found its way into the markets… and it really ought to do so with such compelling value there at present.
Not a recommendation but for example, a diversified energy fund we own has an income yield of nigh 15%. It is also buying-in and cancelling its own shares which trade at a deep discount to the underlying asset value (as they are so attractively priced and that is the best use of its cash). What is there not to like? Warren Buffett also likes energy stocks… At the same time, we are told that all the homes in the UK are now ‘valued’ at £10.7trillion – blocks of stuff which cost lots to keep and within which we live – something is seriously out of kilter here…
The local CAP (Christians against Poverty) is keen to hear from anyone who would be prepared to volunteer as a Debt Coach. If that is something with which you think you could help, Ben would be very keen to hear from you!
The latest Martin Lewis AI scam making an ‘investment proposition’ is disturbing. As Martin Lewis reminds – big tech firms are promoting these things and accepting money for that – how ethical is that?
Maybe what would make a serious and instant change is a class action where everybody losing money on these simple frauds is entitled to claim their losses from the tech companies which promote – or allow – them on their platforms or gadgets, – and also damages for the unauthorised use of his and Elon Musk’s images etc.
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager, Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers