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With base rates cut to unprecedented low levels of 0.25%, investors are finding it increasingly difficult achieving a reasonable level of income from their deposits and investment portfolio. Cash rates of 1.5% are the maximum that can be expected from bank accounts – below the rate of inflation if measured on the more realistic RPI of 1.6% opposed to CPI. With a further fall in sterling after the base rate decision, inflation will probably increase further due to the level of imports the UK makes.

In addition to the rate cut, £70 billion of new quantitative easing (QE) has been introduced with £60 billion targeted at gilts and £10 billion on corporate bonds. Interestingly the corporate bonds targeted will be ones where companies have a direct impact on the UK economy.

Whilst the rate cut is good for homeowners and borrowers, savers are being penalised for being prudent. With negative real returns on cash, and the prospect of absolute negative returns if banks start charging for holding cash, investors have to take risk to achieve a return. Equity income and bond funds are the two obvious places to start.

Attractive yields, compared to cash, are available on many assets, however areas such as bonds are looking expensive and with QE being targeted here, they will probably get even more expensive. Being invested in strategic bond funds gives fund managers the opportunity to find the best value assets. In addition, with the rate cycle different in the US, the M&G floating rate note fund still has a place.

A weakened sterling has given a boost to the yield from the FTSE 100 as many companies declare and pay in US dollars. In addition export orientated companies will benefit from being more competitive on a global stage.

Available yields

FTSE 100 – 3.85%.
UK Equity Income sector – 4.1%.
Typical £ corporate bond fund – 3.5%.
Typical High yield corporate bond fund – 5%.

The reintroduction of quantitative easing will filter through quickly to risk assets, such as equities and bonds and will make low yielding assets even lower yielding. With sterling down and the stock market up, overall risk assets i.e. equities and bonds should respond well.

 

Ben Yearsley August 2016

 

This article represents a personal view from Ben Yearsley, and is based on his opinion of economic data from across the globe. It should not be used for investment purposes and does not constitute advice. For investment advice please refer to your financial adviser. No party should act or refrain from acting on anything contained in this material. Relevant primary materials should always be consulted at all times for all purposes cialis kaufen schweiz. No statements or representations made in this material, document or at the presentation are legally binding on Shore Financial Planning (Plymouth) Ltd or the recipient and no liability is accepted in connection with this material. This article may not be reproduced or circulated without prior permission. Issued by Shore Financial Planning (Plymouth) Ltd, authorised and regulated in the UK by the Financial Conduct Authority.

© Copyright 2016 Shore Financial Planning (Plymouth) Ltd.

Shore Financial Planning’s Ben Yearsley on Base Rates
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