This is the personal view of Cliff Weight and does not represent the views of ShareSoc. Cliff Weight is not authorised to give financial advice and nothing in this article should be interpreted as advice.
The 13 year Quantitative Easing* experiment has finished. Between March 2009 and June 2022, the Bank of England bought 57% of the £1.5trillion of gilts sold, according to the FT see https://on.ft.com/3xcx6mL
I feel more comfortable. The laws of economics I was taught at university in the 1970’s and learnt thereafter give me a framework to understand what is happening, which for the past 13 years they did not.
Instead of 0.25% interest rates, we now have gilt yields of 3.1%, having surged from 2% in early August. Gilt yields are projected to rise to 4.2% next year.
The expected risk premium of say 5% or 6% gives an expected return of 9 or 10% p.a. Of course, with equities nothing is guaranteed and we must always remember that on average one year in six the market declines. I found some good stats on market returns here from this webpage from IG Group – who are Sponsors of ShareSoc’s Investing Basics course (which is due to be released shortly) https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100–200529
I have written before about the 30 year bull market in gilts and bonds and warned that projecting that trend to continue was high risk and in my opinion unlikely to be a successful strategy.
Those who thought gilts were a “safe” investment will have seen their investment lose 25% of its value in the past 12 months (see https://www.fidelity.co.uk/factsheet-data/factsheet/IE00BH04GW44-vanguard-funds-plc/performance).
A comparison of iShares Global Corporate Bonds and Vanguard UK gilts for the period 30/6/20 to 30/6/21 showed similar declines by c 6% and 7% respectively, but for the period 30/6/21 to 30/6/22 the Bond ETF went down 6% whilst the (supposedly safer) gilts ETF went down 15.5%. (Source Fidelity website).
Those who have adopted the benchmark 60/40 model of equities to bonds, will have seen their bond portfolios decimated of late.
There is one important silver lining. The discount rate for pension liabilities is based on the risk free rate (in my view a bizarre bit of accounting for the past 15 years when Quantitative Easing produced anomalous results). As the risk free rate has increased, these “liabilities” have shrunk hugely. Expect lots of pension holidays and profit jumps as pension write backs may occur. Companies with large pension deficits may be worth looking at.
QE has led to a huge transfer of wealth to those able to borrow at low rates and invest in good companies. It was the very rich who did best. Private Equity and tech were particularly good places to invest. It will be interesting to see what will be the best places to invest in the next two decades.
*The introduction of new money into the money supply by a central bank.