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If I told you there was an investment that was mathematically guaranteed to beat inflation by 2.4% or so over the next 20 years, I think that would be attractive to plenty of people and institutions. The catch, of course, is you only make that return if you don’t sell it. But plenty of institutional investors (and some private ones) can model their assets and liabilities and allocate some funds to longer term investments. And if you are at the more conservative end of the spectrum, I think this sort of thing fits the bill.
This investment of course exists. It is the 20-year UK index-linked gilt. And the US equivalent is even more juicy, paying inflation + 2.7%. And if you are not too worried about inflation you can instead buy the 20-year gilt which is paying a yield of 5.4% today. I write this because when I talk with clients and colleagues (and even some of our research providers) the feedback I get is this is in fact one of the least attractive investments out there. This week we had higher than expected inflation numbers out of the UK. And in the US the Republican tax bill is doing nothing to reduce a deficit that is running at almost 7% of GDP (when times are good!). Neither of these are bond market friendly and bond yields rose (and prices fell) again this week. Investments with poor fundamentals and which regularly lose you money are understandably not that popular.
Investments which are attractive on paper but which no one wants are, of course, what makes the job hard/interesting. What might change sentiment here? In the short-term tariffs only make things harder for bond markets by pushing inflation higher. In the longer term, however, tariffs are both a tax rise for US consumers and a problem for global exporters. As the inflation effect washes through, I’d expect slowdown risks to come to the fore. The risk remains that (backwards looking) hard data catch up with (forwards looking) survey data. Or the dark blue line catches down to the lighter one here for the global economy:
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
