Our motto is Keep it Simple.
In 2008 we thought the banking crisis and monetary squeeze looked bad, so we stayed in cash or moved into cash for our discretionary clients. We reasoned if we were wrong they would still make 5% on their money, and if we were right they would save themselves a nasty fall.
This year we have been invested in shares and corporate bonds. The returns on cash were poor, and it seemed likely the authorities were going to print and create money to try to instigate a recovery.
The most obvious thing to say about the year ahead is that UK government bonds still look dear, even after the sell off last week. We have said to our clients, avoid them. When did people last get rich by lending to the UK government at 2-3%?
What do you think is going to happen when they stop printing more money to buy their own bonds? Do you think at some point the Bank of England will want to start selling all those bonds it has bought up? What happens to the price of bonds if the government has to issue more to replace the ones the Bank has bought? What interest rate will the government need to offer to sell another £200 billion of gilts without the Bank as a buyer?
Before last week’s sell off most of the UK government bonds were trading above their repayment price, so you knew if you held them to repayment you would lose money. You were relying for your return on the fixed income they pay and the opportunities to reinvest that income. If we are right about government bonds we will spare you some guaranteed losses if you hold to redemption, and some larger losses if you need to sell in the market and the government bonds do fall in price as we fear.
If we are wrong, and the government holds the confidence of investors, it is difficult to see you making much money on them. Meanwhile other assets in such circumstances are likely to make you more.
Keeping it simple meant staying in cash during the crisis. Today it means staying out of gilts or selling any you have left. I would hurry whilst the government is still a buyer. In the past when UK governments have had to borrow a lot, gilts have fallen and interest rates have risen. Why should today be any different?