Snow news is good news

 In Finance & Investments

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SNOW NEWS IS GOOD NEWS

I am writing this introduction just before Christmas with snow on the ground and the airport terminals full of frustrated passengers. I guess they are not playing “White Christmas” at Heathrow!  Now you will be thinking that as I know you won’t get to read this until the Spring, such comments are at best anachronistic. However, I want to use the weather conditions to illustrate the point that what may be good news for some investors can sometimes mean unpleasant consequences for others in the investment markets.

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Interest Rates

Interest rates are much talked about in the media and to be frank a lot of the commentary is ill-informed and misleading. We know that to most of our clients the obvious consequence of low interest rates is poor returns on deposit accounts and the prospect of poor annuity or pension rates. So interest rates going up must be a good thing?

Not necessarily. The consequences will not be wholly good for investors. In fact a change in expectations about interest rates may be really rather damaging for investors in simple corporate bond and gilt funds. Note that I say expectations – most readers will know that stock markets move ahead of actual events if there is a common view that something is very likely to happen (the common view may be wrong, but that’s irrelevant!).

Inflation

The current economic background is that the policy makers have thought it appropriate to keep interest rates low to allow economic recovery to get properly under way and have treated inflation as an unlikely risk. I have for around a year been in the camp of a small minority that says that analysis is wrong for a variety of reasons. If we doubters are right, and it looks like we are, inflation is going to be a real problem and then the only option for policy makers is to start raising rates and probably quite quickly, albeit in small steps.

Once the market believes that the long term direction of interest rates has changed, it will look for higher yields on fixed interest securities. If that belief is linked to a serious concern that inflation may be running way ahead of target, even better yields will be required to protect against capital depreciation. That means only one thing for loan stock or bond securities already priced in the market – capital losses.

Result

So we are reviewing bond fund weightings and encouraging clients to take some profits if they have not already done so.

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