Investments  

The impact of government debt on your clients

  • Describe the risk of inflation as a result of higher debt levels
  • Explain what the multiplier effect is
  • Identify the potential impact on investments of higher government borrowing
CPD
Approx.30min

Portfolio impact

Gero Jung, chief economist at Mirabaud, says it is a central tenet of investment theory that if interest rates are low, then equities will rise in value.

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This is because many equities are priced relative to the return available on cash on bonds. Low bond yields and low interest rates therefore make equities relatively more attractive.

He says it is unlikely that interest rates will rise for many years into the future, and this will be supportive of equities. 

Mr Gimber says the yield on government bonds is now so low that they are an unattractive investment.

He says: “The rationale historically for owning government bonds in a portfolio is that they are a diversifier and they pay an income.

"But now they don’t pay an income and the diversification effects may not be as strong as in the past. I think real assets are more interesting, as they offer income and can offer inflation protection.”

Mr Moec says in the short-term the profits achieved by companies will be lower, as they deal with the higher costs of restrictions, and are unable to pass the costs onto consumers due to the pressure on wages and higher unemployment.

For this reason, he believes that investors will simply have to accept lower equity returns for the foreseeable future. 

Mr Bell agrees that returns to equity investors will be lower in the years ahead, but he believes the returns will be more attractive than those available from other asset classes. 

David Thorpe is special projects editor of Financial Adviser and FTAdviser

 david.thorpe@ft.com

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Why is inflation unlikely to be a factor in the UK?

  2. What is an exogenous shock?

  3. The multiplier effect is particularly powerful in the construction sector, true or false?

  4. Quantitative easing programmes typically cause asset prices to rise, true or false?

  5. Why could the UK's economic recovery be V shaped?

  6. Why might equities keep rising in value, according to Gero Jung?

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You have successfully answered all the questions correctly, well done!

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  • Describe the risk of inflation as a result of higher debt levels
  • Explain what the multiplier effect is
  • Identify the potential impact on investments of higher government borrowing

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