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A great experiment?

16 December 2014

Loose monetary policy has depressed yields from a range of assets, but equities continue to offer income opportunities.

For Britain’s investors and savers, finding income has been a particular challenge as the UK economy has continued down the long road to recovery. Many of us will recognise the dilemma of trying to generate sufficient income in an era of low interest rates and steady, persistent inflation. But, as UK economic growth has started to outpace the other advanced nations, there are signs that the prolonged squeeze on wages is coming to an end. The Office for National Statistics has reported that, in the third quarter of the year, wage increases beat inflation for the first time in five years.

With wage growth also gathering some momentum in the world’s largest economy, signs of improved pay on this side of the Atlantic are strengthening by the month. Governor of the Bank of England, Mark Carney, believes that pay growth is set to accelerate and expects the growth in earnings to outstrip inflation over the next year. All of this is good news for the employed and wage earners, for the wider economy and for the ability of households to secure the income growth needed to spend, save and invest.

Savers’ struggle

But the challenge is even greater for those relying on savings to supplement retirement income and maintain their standard of living. The search for income has always required a diversified outlook and consideration of investment in equities, bonds, commercial property and cash. The problems faced by savers are legion: rates on deposits have been slashed since the Funding for Lending Scheme was introduced two years ago; forecasts of lower inflation are pushing back expectations of a rise in the historically low base rate beyond next year’s general election; and any rise, when it comes, will be low and slow. In short, cash is not the answer for those seeking inflation-beating income.

The ultra-loose monetary policies pursued by central banks since the financial crisis have also driven down yields on other ‘safer haven’ assets such as government and lower-risk corporate bonds. This has led to historically low levels of volatility, plenty of capital looking to be invested, and bond yields which are close to zero. Governments and companies have been able to borrow money at lower rates of interest than has been the case historically. In this environment, investors have struggled to find meaningful income returns.

Not only is the current environment for income-seekers challenging, it is also unusual. A look back over 30 years shows that, in the great experiment that is quantitative easing, those looking for income have been the losers. The yields available today from ‘safer haven’ assets are much lower than their average over the last 30 years. However, in contrast, the dividend yield available from equities is much more in line with the long-term average.

Asset classes

Rising income

Adrian Gosden of Artemis, who co-manages the UK & International Income fund for St. James’s Place, points out that equities have consistently been able to provide attractive and rising levels of income over the medium to long term. “As with any asset class, equities are not a panacea for income investors. However, with corporate profitability on the rise and the economic recovery slowly taking hold, those looking for income should consider the role that a globally diversified portfolio of equities can play in meeting that need,” says Gosden.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested. Equities do not have the security of capital which is characteristic of a deposit with a bank or building society.

The opinions of Adrian Gosden are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James's Place.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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