THE astonishing pronouncement from the Chancellor that we are facing arguably the worst economic downturn (notice he avoided the word recession) in 60 years, will have done little to boost investor sentiment.
However, it did seem to fit the prevailing mood of the media in which the only news to be reported is bad news. This seems for some time now to have become the norm, and understandably when we are bombarded with negative news we tend to believe that
everything is gloomy. Within the context of investment markets, such acceptance of the presented information can often lead to a loss of focus on what is really important, as well as a tendency to bury our heads in the sand and hope for better times further down the road. Sadly, such actions can be very costly indeed.
It is in times such as these that the value of professional advice should not be underestimated. When markets are rising, pretty much anyone can make money and you will not be short of people telling you which funds to buy. Indeed, if you read the papers or travel through train stations or airports you will be bombarded by posters promoting these funds. I have written before about the folly of such information, which serves the needs of the investment houses far more than it does the investor. Commercial property was the message 18 months ago, remember? Likewise technology funds in 1999. What a shame that there are far fewer people around to tell you when to sell a fund, and what to do with the proceeds. Ask any professional investor and they will tell you that a sell discipline is the hardest habit to practice, but also the most vital.
I spend a lot of time reviewing existing portfolios for clients, and am always attempting to ensure that whatever holdings they might have are appropriate going forward. It is very difficult to recommend changing a fund that has done well, and equally challenging to suggest a change for something that has done poorly, because this implies crystallising a loss. However, both scenarios need to be covered, because, in investment markets, the only constant is change.
Take fixed-interest markets for example. Here we are talking about cash, gilts and corporate bonds, but essentially we are talking about income. For some time now, cash has been king because of interest rate rises. But when interest rates fall, the income from cash also falls and bonds become more attractive. Right now, the consensus view suggests interest rates cannot be cut because of rising inflation, but looking forward I believe it is likely to fall, and quite possibly by a significant amount. If this is correct, then we will see interest rates cut dramatically. The fall in supply of credit and the likelihood of recession are the primary reasons for supporting this view. The high oil price also needs to be factored in, but as we have seen a move from around $70 a barrel to $115 over the past year, to have the same impact on inflation next year, it would need to move to $220. Certainly possible, but perhaps unlikely.
Taking all this into account, investors should be looking closely at the fixed-interest (including cash) element of their portfolios. The spread offered over gilt yields by investment-grade corporate bond funds is now around 2.5 per cent and the average yield is around 7.3 per cent. This must be seen as extremely attractive to income seekers. Looking back, the most recommended corporate bond fund from two years ago has fallen in value by around 9 per cent over the past year, largely due to its exposure to sub investment grade bonds. These have, and will continue to, suffer significant default rates due to the enduring economic slowdown. Therefore, we have a classic example of how things change even within a single investment class.The real message here to investors is to look closely at what you already have and, if required, seek out professional advice to ensure that you are as far as possible correctly positioned as the next phase of the economic cycle plays out.
Ken Taylor is director of Mackenzie Taylor Wealth Management
The full article contains 714 words and appears in The Scotsman newspaper.
