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Investment view

It does no harm to have luck on your side. Too many investment managers fail to acknowledge the part that luck can play in the performance of their portfolios and it is starting to look as though Chancellor Gordon Brown is enjoying more than a little good fortune at present. Last week&#39s revision to economic data suggests that the economy has been growing closer to the long-run average of 2.5 per cent than previously thought. This time last year, few expected UK plc to perform in such a robust manner.

Although there may be further revisions to come, the upward adjustment to figures published earlier for the first half of the year has brought 2003 growth up to 2.3 per cent rather than the 2.1 per cent previously estimated. This now puts our economic performance ahead of the Treasurer&#39s original forecast and suggests that year-on-year growth at the end of 2003 was running at 2.8 per cent. No wonder sterling is strong.

Although the pound has slipped back a little from the $1.90-plus level it achieved a few weeks ago, it is continuing to strengthen against the euro. At one stage, the eurozone&#39s single currency had risen to comfortably over 70p. It is now less than 67p, a reflection of the disparity both in interest rates and economic performance between here and Europe. Trips to the Continent are starting to look better value again.

One interesting side-effect of these latest GDP figures is that they strengthen the case for further interest rate rises from the monetary policy committee. This in turn is likely to support sterling&#39s strength. This will not be good news for British exporters but it should help keep the lid on inflation. It looks as though it would be unwise to be short of our domestic currency for the time being.

Official statistics on the state of the British economy were not the only information shared with the investment world last week. In what was probably the busiest week for company results so far this year, the overall trend towards surprises on the upside was confirmed. True, a weaker dollar has damaged profits in a number of cases but by and large it has been good news. Commodity prices are booming, life companies are enjoying widely varying fortunes and the banks appear to be coining it. There was been plenty to get your teeth into.

This is not a picture that should be worrying those who consider that we are now in a new bull market and it looks as though investors in general are taking a similar view. Figures published by the Investment Management Association confirm that UK all companies was the most popular sector during January, accounting for 21 per cent of gross retail sales. Interestingly, corporate bond funds enjoyed the second-place slot, down from number one at the end of last year. It is interesting how money is still pouring into this sector.

Corporate bonds have been a profitable place in which to keep your money over recent years. A combination of falling interest rates and improving economic performance have helped keep this market buoyant. But can this continue if interest rates maintain their upward path in this country? On balance, my view is that there is not too much risk to this market overall but that most of the fun is now behind us.

Corporate bonds have become a heavily researched investment area. There are specialist management houses and an ever-widening array of funds that provide investors access. The trouble is that most retail investors do not appreciate that corporate bonds differ vastly in nature. As a general rule, you can reckon that the higher the yield, the greater the risk of default but the fact remains that many investors do not appreciate that the corporate bond market has an escalating volatility that makes it appear much as the equity market did a generation ago.

These days, when companies hit the buffers (as many have proved can happen with little warning), holders of the corporate bonds can be as much at risk as equity investors. But with the average yield on equities down to 3 per cent, the returns from these funds can prove useful in portfolio planning. Moreover, a properly run fund should deliver some measure of price stability. There will be few portfolios these days that will be able to justify not having a broader spread of asset classes than used to be the case.


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