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Brian Tora: When good news is bad news

With the Bank of England promising interest rates will increase as the ecomony improves and the US Fed threatening to taper QE, markets are sensitive to good news.

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Such is the sensitivity of the market that the day Bank of England governor Mark Carney announced the economic recovery here had taken hold, the FTSE 100 index shed nearly 100 points.

While it did recover some of this decline the following trading day, it demonstrates how worried some investors are over the potential loss of cheap money. Given the success of recent share issues, one does have to wonder just how much of the cash created by governments has found its way into financial assets.

Of course, this is simply a rerun of what took place when the Fed merely hinted at tapering. And tapering is what it says – a cutting back of the bond buying programme, not a wholesale abandonment of quantitative easing. Similarly, Carney suggested that interest rates could go up only if the good news continued. In describing the sort of environment when it might be possible to consider such a move, it was made clear that nothing was likely to happen before the end of next year.

Subsequent comments from fellow monetary policy committee member Paul Fisher in a radio interview made clear that interest rates were expected to return to a more normal 4 per cent to 5 per cent. Good news for savers, but what of those with mortgages? Interestingly, the level of house repossessions has remained very low during recent difficult times, partly because banks have become more accommodating but also as a consequence of a prolonged period of low interest rates making mortgages more affordable.

The recovery in house prices, which appears to be extending around the country, has also helped. However, it is clear that investors need to start factoring in a rise in interest rates into their portfolio planning. While the most obvious evasive action to take would be to shed low yielding government bonds, there will be implications for sector strategy within the UK equity market.

But with inflation as subdued as it is – even here – it is hard to see rates being increased soon, unless economic growth continues to build to above trend levels – unlikely – or it is to cool down the residential property market. So watching what happens to house prices should also pay dividends.

All in all 2014 appears to be shaping up to be a year when the investment landscape could undergo significant change. How best to react to that change will be a challenge.

So perhaps the opportunity to chair a debate on structured products last week was timely. I have never been a great fan of these sometimes complex instruments. My one foray into this arena did not appear particularly successful, though with hindsight it could be argued that it turned out to be a better strategy than taking a long only position in the market in question. I at least had my money returned without loss. Had I bought a fund investing in this market, I would, as like as not, have lost money.

Structured products clearly fall into the marmite category of investments. Those on the panel loved them. The audience was less sure. In particular, some referred to the constraints placed upon them by the regulator when it came to recommending such instruments to their clients, while one IFA told me that his professional indemnity insurer had a thing or two to say about including structured products in his armoury of investments.

The reality is that the range of these products that are available is wide and varied. Some will undoubtedly suit certain specific circumstances, but there are issues to take into account, such as counterparty risk.

I learned a great deal from the experts that debated their merits that day and confess my attitude towards them has softened a little. My concern that they are insufficiently understood remains.

Brian Tora is an associate with investment managers at JM Finn & Co

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