Opinion  

Living through a financial experiment: Investec

Alastair Mundy

We are living through a financial experiment, which has seen central banks print an extraordinary amount of money and use it to buy an equally extraordinary amount of government bonds.

Anyone imagining this would happen 10 years ago would have been treated with derision, as it would have been considered a highly inflationary strategy.

However, market participants have now become accustomed to these conditions (like frogs in boiling water?) and as inflation has remained quiescent, quantitative easing is not viewed with much suspicion.

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Perhaps it isn’t dangerous or perhaps the unintended consequences of printing all this money have yet to be seen.

Even if only one of the three concerns: valuations and corporate profitability at high levels, increasing debt and the unintended consequences of aggressive monetary policy was apparent, we would be defensive; the presence of all three makes us determined to act.

In the UK, we invest in out-of-favour companies predominantly from the FTSE 350 and pickings have been slim.

Over the last few years we have been building our exposure to bank shares. Many investors are concerned that the apparent never-ending regulation of banks has destroyed their long-term prospects.

However, banks valuations now discount much lower levels of profits and are, we believe, modestly valued.

Some of them, such as HSBC, are already high yielders, and others, such as Lloyds (and at a later date RBS), are on the way to reinstating significant dividend payments.

We think this, combined with the increased transparency in the sector, should increase bank shares’ attractions in the next few years.

We also believe there will be opportunities in the complementary assets which we hold in our Cautious Managed fund to offset some of the volatility of equity markets.

If investors lose confidence in the ability of central bankers and politicians to engineer a meaningful economic recovery, gold and gold shares, Norwegian government bonds and a short position on the US market should help insulate our portfolio against unexpected volatility.

Alastair Mundy is a portfolio manager at Investec Asset Management