View more on these topics

Investment View

Sir Edward might have to write that letter, now that inflation is down to 1.8 per cent. If the monetary policy committee undershoots the Government&#39s target by more than 1 per cent, then the governor has to explain why. In case you wonder why some inflation is considered desirable, then cast your eye across to Japan where deflation has undermined consumer and business confidence.

The significance of low inflation – in the short-term, at any rate – is that it makes further rate cuts more likely. Following last month&#39s US interest rate reduction, we are now the proud possessors of the most expensive money among the world&#39s developed countries. The Fed Funds rate is 5.5 per cent compared with our own 5.75 per cent while eurozone interest rates are a full 1 per cent lower. The market here is factoring in further cuts and there seems little reason to believe the disparity between ourselves and Europe will remain this wide. If Europe starts to cut rates it is unlikely to be by much, given the robust statistics from the Continent.

Figures from Italy and the Netherlands suggest economic growth at the end of 2000 was around 3 per cent. This may be a pale shadow of America – and much less than Ireland – but it hardly represents a recession. But a useful bounce by the euro against the dollar has run out of steam. It may be because fears of a full-blown US recession are receding. Unfortunately, eurozone central bankers were beginning to become used to the idea of dollar/euro parity.

History shows falling interest rates are good for equity markets, yet there is no sign of the UK market anticipating cheaper money. Perhaps it is because much of the interpretation of the data available is contradictory. One research note I read last week suggested that both America and the UK would flirt with recession while another pointed to the unacceptably high level of monetary growth, particularly in America, as a factor likely to restimulate inflation.

In my view, America is unlikely to have a full-blown recession, with the real pain being caused partly by the speed of the slowdown in the US economy, but also because of the significant and rapidly developing problems in the new economy. Investors had not factored in that technology companies had done so well previously because of the accelerated level of expenditure in 1999. They are now seeing the effects of falling demand because there is no need to upgrade software or equipment that has proved to be robust in the wake of the millennium bug along with the realisation that spending on technology is as economically sensitive as any other area of expenditure in business. Telecoms, of course, has its own problems.

If correct, this interpretation of what has happened in markets suggests better conditions should return later this year in some areas of the economy. In the meantime, an area that seems to have been overlooked is that of zero dividend preference shares, where considerable value is available. In part, this is a reflection of concerns that a real bear market may yet undermine the trusts&#39 ability to re-pay preference issues. As the management houses that specialise in split-level trusts are only too keen to tell you, no preference share has yet failed to be repaid while the hurdle rates of most issues demonstrates that portfolios actually need to decline in value on a regular basis for full redemption not to take place.

Whenever I meet with investment IFAs, they all seem to have bought into the concept so I wonder why the yield premium that zeros demand over conventional bonds remains as high as it is? Perhaps people really are sitting on cash, just waiting for the opportunity to tip it into the equity market. What a comforting thought.

Recommended

Saving for an election day

A general election is looming. Some bookmakers have stopped taking bets on a May election and the Conservatives are staking out personal finance as a battleground. Shadow Chancellor Michael Portillo says a Conservative Government would cut the tax on interest earned on savings unless savers have an income above £32,000. Above that threshold, the current […]

Easyvalue.com takes Synaptic Systems software

Easyvalue.com is incorporating the quotation engine from Synaptic Systems into its website to allow comparison of life insurance policies online. Level term and mortgage protection policies are the first products to feature on the site, with Friends Provident, Norwich Union Life, Permanent Insurance, Scottish Provident, Swiss Life and Legal & General offered through the portal. […]

MPs&#39 swords miss their targets

The much anticipated Parliamentary inquiry into the Equitable Life debacle was finally held last week and the media turned out in force to rub their hands in glee at the downfall of one of the UK&#39s oldest life offices. The event was so popular that the hearing had to be moved from the small chamber […]

Davies blocks Cousins quizzing civil servant

FSA chairman Sir Howard Davies has been attacked by the Treasury select committee for his handling of the Equitable Life inquiry. Davies came under fire from MPs last week after he refused to allow Labour MP Jim Cousins to question FSA head of insurance Martin Roberts about his role in the affair as both DTI […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com