March 2009

Boosting Income

Many individuals are rightly
concerned with regard to the current
economic situation, with the Bank of
England interest rate at an historic
low of 0.5%, inflation as measured
by the retail prices index at 0.1%
(consumer prices index is 3%) and
over 2 million now out of work the
picture looks somewhat bleak.
Press reporting has been unhelpful,
with sensationalism being the key
driver. It would appear that the press
is only too willing to push the views
of the most pessimistic so called
experts and hedge fund managers,
I may be wrong but could some
of these individuals have a vested
interest in talking the markets down?
In any event we are in a situation
where obtaining a reasonable
income on capital is increasingly
difficult for low risk investors.
There appears to be little press
comment on the effects of
“quantitative easing” on inflation.
Quantitative easing is the process
of increasing money supply in the
economy without actually printing
bank notes. The Government is
spending £78 bn in repurchasing the
Nations own debt which is issued
in the form of GILTs. The funds to
do this are created by effectively
pressing a button within the Bank of
England. This capital will end up in
the accounts of those holding GILTs,
in this case mainly banks who it is
hoped will then have large levels of
cash to increase their ability to lend
- with the money eventually ending
up in the real economy. The purpose
is to increase liquidity where the
normal process of reducing interest
rates has failed.
With the money supply increasing it
is possible that inflation will become
a problem in the next few years and
this factor should not be discounted
in future investment plans.
In view of the poor returns on
cash in the bank it is important to
consider other options, it should
be remembered that investment is
for the long term and with current
valuations the downside risk is
probably much reduced from say 18
months ago and in the longer term
the current market valuations should
present an opportunity.
For those who remain uncertain
and do not wish to risk their capital
other options are available. National
Savings Certificates offer capital
guarantees backed by the UK
Government with fixed terms of 3
and 5 years on their Index Linked
issues. These currently offer a return
of 1% above the rate of inflation as
measured by RPI - over a 5 year term
these should look reasonable value
unless deflation takes a real hold;
returns are tax free.