30
20
% 10
%
Gilts
0
THE CONTRARIAN GILTS
Gilts versus index – 1 year
MSCI World
FTSE British Government
All Stocks
UT UK Gilt Retail
-10
Feb ’09 Apr Jun Aug Sep Nov
Source: Financial Express Analytics
Gilts versus index – 3 years
30
20
10
0
-10
-20
FTSE British Government
All Stocks
MSCI World
-30
Feb ’07 Aug Feb ’08 Aug
Source: Financial Express Analytics
UT UK Gilt Retail
Feb ’09
Aug
Jan ’10
Relative performance of currency indices
Feb ’10
3m 6m 1yr 3yr 5yr 10yr
FTSE GiltsAllStocks £ -1.07 2.47 4.26 6.21 5.18 5.62
IBOXX £ Gilts -1.11 2.60 4.51 6.29 5.16 –
IBOXX £ Corp 2.96 11.09 22.59 2.54 3.08 –
MSCI World $
Source: Morningstar
1.21 7.16 33.46 -9.30 -0.40 -1.77
Is the consensus
view correct?
The Bank of England’s decision to halt quantitative
easing has only enforced the consensus bearish
view of gilts, but is it really so wise to avoid the
asset class completely?
BY TIM COCKERILL, HEAD
OF FUNDS RESEARCH AT
ASHCOURT ROWAN
The outlook for gilts is
very clear based on the
presiding consensus view.
Yields are going to rise and
capital values as a consequence
are going to fall.
The assumptions behind
this view vary, but there
are three main components
forming it.
Firstly, when the Bank
of England’s quantitative
easing programme stops,
a significant supporter of
the gilt market disappears,
and it has been the Bank
of England and the quantitative
easing programme
that has kept the gilt
market as buoyant as it is.
It is true that the Monetary
Policy Committee (MPC)
has pumped very nearly
£200bn into the UK gilt
market, and therefore indirectly
into the economy
– hence the belief that the
withdrawal of the stimulus
must surely be negative.
Conventional economics
tells us that as the supply
of a product increases the
price should fall, unless
demand increases at the
same or a faster rate. The
issue of new gilts has
been quite astronomical,
consequently this wisdom
seems logical. The graph
on page 59 clearly shows
the extent of new issuance
even allowing for maturing
gilts. Much of the focus
has been on the quantity
of issue in 2009, but the
projected issuance for 2010
is huge, £176bn, and one
argument raises the question
as to who is going to
buy them?
l Downgrading the UK
The third issue is the concern
over the credit rating
of the UK. Recently Greece
and Dubai were downgraded
by the rating agencies
– so why not the UK?
This is a hotly debated
subject and an element
of national pride comes
into play, with some commentators
of the opinion
that the UK will not be
downgraded for political
reasons – but the threat
remains. Indeed this issue
will probably move up the
agenda as the general election
gets closer. We know
both main parties have said
they will tackle the deficit,
but how effective they
will be is another matter
and perhaps one that the
rating agencies will pass
judgement on.
l Following the pack
But will the consensus
be proved correct? After
all, there are plenty of
instances to point to where
the consensus has been
wrong. How often have
‘walls of money’ been predicted
only to turn out to
be mythical?
In March 2009, virtually
Gilt mkt dbt interest
Financial year Debt interest
(£bn)
’98-’99 28.8
’99-’00 25.0
’00-’01 26.0
’01-’02 22.1
’02-’03 20.9
’03-’04 22.3
’04-’05 24.0
’05-’06 25.6
’06-’07 27.6
’07-’08 30.0
’08-’09 30.5
’09-’10 27.2
Source: Debt Management Office
58 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
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