A GILT EDGED PREDICTION
Welcome to a New Year!
At this time of year it is normal for astrologers to look to the skies and predict what is likely to happen based on the position of the stars and the planets. I would not normally get involved in such nonsense, but this year there is one prediction I am fairly confident about making, but this is based on current circumstances and has no reference to the stars.
Twenty years ago Aberdeen Football Club bought Hans Gillhaus so he could link up with Charlie Nicholas in attack. At the time this meant Aberdeen had the current Dutch international striker playing with someone that had previously led the line for Arsenal. Now, the reason I bring this up is that today this seems unbelievable. How could a club like Aberdeen afford to buy and pay for such talent? The simple answer of course is they could not. At the time it was normal for clubs to live beyond their means and in that respect Aberdeen were no different, but a day of reckoning had to come, and sure enough it did. Rather like a hangover that goes on for days after a few hours of over indulgence, the two to three seasons that Aberdeen kept this team were great fun, but the seventeen years since then have been torture.
The reason I mention this is the UK has, since 2000, been living well beyond its means. When tax revenues were booming in the early 2000’s, rather than save this extra revenue for more lean times, like someone going for a mortgage to the bank and getting a multiple of their income for a loan while at the same time suspecting their income is likely to fall in the future, the Government used this unsustainable income level as a base for borrowing. The result is that sometime in the next few years the amount of debt in the UK as a percentage of GDP is going to be greater than Argentina’s.
The upshot is the Government will be issuing record amounts of Gilts in the coming years. Last year £220bn was issued and, apart from one auction early in the year, they were all fully subscribed. However, as one of the main purchasers was the Government itself through its “quantitative easing” measures there has to be some doubt as to whether this year's issuance will be as successful.
To ensure new Gilts are purchased it is likely the “coupon” (the amount of interest a Gilt pays) will have to rise. This is likely to result in a corresponding increase in the yield of the Gilts already in issue, which will result in their capital value falling. The chain reaction is that there is every chance we could see a massive selling of UK Gilts by investors thereby exacerbating the problem.
Also, just as Aberdeen’s debt meant the team fell further and further down the league, we could see the same apply to the UK as there is a possibility, albeit small, that the debt issued by the Government will be downgraded, and we may lose our coveted AAA rating.
I know this has been long winded, but this means that far from being a safe haven it is likely that in 2010 Gilts will be one of the more volatile asset classes, and one that, if people owning them are not careful, could end up costing them a lot of money. This is particularly pertinent for those with stockbroker portfolios as quite often Gilts are held within them as a matter of course.
As for the long term we can only hope the UK gets back on its feet far quicker than Aberdeen FC!
Steven Forbes
Managing Director
DECEMBER 2009 FACTS
MARKETS AND MANAGERS WE MET LAST MONTH
FTSE All Share
1 year return +22.0%
5 year return +13.8%
S&P 500
1 year return +25.2%
5 year return -0.1%
FTSE Eurotop 100
1 year return +22.9%
5 year return 0.0%
Standard Life UK Opportunities
(Caspar Trenchard)
1 year return +57.9%
5 year return +51.7%
Jupiter Financial Opportunities
(Philip Gibbs)
1 year return +11.9%
5 year return +89.3%
Schroders Global Property Securities Fund
(Jim Rehlaender)
1 year return +23.5%
Since launch December 2005 +10.6%
(source - ft.com 4th January 2010)
Best Bank Accounts
West Bromwich Building Society paying 2.6% available over the postal or telephone system with instant access.
Investec Bank High 5 Account paying 3.25% gross, minimum investment £25,000 and three months’ notice required on withdrawals.
(source –Moneyfacts January 2010)
