Originally published on 13 Janaury 2009
By Andrew Merricks
Head of Investments, Skerritt Wealth Management
2008 will go down as probably the most momentous year in
financial history. 2009 will be the year that we find out whether
our World leaders have created kill or cure for our woes.
It is quite incredible that just a few months after the Bank of
England was being criticised for allowing inflation to surge above
5%, and for failing to raise interest rates quickly enough to curb
the threat that this was bringing, the expectation now is that they
will follow the Federal Reserve in the US and the Bank of Japan by
cutting rates to close to zero as a monetary defibrillator for the
faltering global heartbeat.
Putting it bluntly, the short term printing of money will either
work – or it won't. No one, at this stage,
knows.
If it works in the short term, we can expect that the inflationary
flames will have been well and truly fanned within the next couple
of years or so. At the moment investors are happy to buy Government
Bonds and yields have dropped accordingly. This could reverse very
rapidly if inflation is let out of the bag and you would not want
to be caught in the rush out of Treasuries if that happens.
If it doesn't work, then we face the daunting prospect of
having little else in the armoury to use and a prolonged
"Japanese style" period of deflation is likely to follow.
As a reminder, the Japanese stock market traded at 38,000 in 1989.
It remains around 9,000 today – testimony that what goes
down doesn't necessarily go up again.
Clearly these are testing times. With interest rates and gilt
yields at historic lows (and getting lower), and with stock markets
likely to remain volatile while the hedge fund industry continues
to shake itself out, it has rarely been so difficult to know what
to do with your money. One thing is certain though. Now is not the
time to leave your investments, wherever they are, to chance.
Flexibility, accessibility and the willingness to move quickly are
attributes that will be needed in the months ahead.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.