In his speech last week, Bank of England Governor Mark Carney signalled that we may have low interest rates in the UK for considerably longer than expected.
The Bank of England inflation report confirmed that the outlook for global growth has weakened. While this is great news for borrowers, it prolongs the poor returns that savers have had to endure for many years now. Many savers whose fixed rate bonds are coming to an end this year are seeing the replacement returns that are offered reducing to less than one per cent in many cases.
An actively managed, balanced investment portfolio can provide the potential for a higher return for those who are comfortable with short-term fluctuations in values. Gilts, loans to the UK Government, are still an important part of a balanced portfolio. Gilts have returned 4.5 per cent over the last 12 months, but care should be taken when investing in these as they will not perform well when interest rates do eventually rise.
Likewise, corporate bonds, which are loans to companies looking to expand, have produced returns of over 3.5 per cent in the last 12 months. The performance of these will also be under pressure when interest rates start to rise and capital losses will be likely if inflation and interest rates rise considerably.
Some of the factors that have contributed to low inflation, such as falling oil prices, will shortly be dropping out of the inflation figures, although core inflation still remains low. For investors who do not want to take on the risk of capital losses, there are a variety of capital-protected investments available. The downside of a capital-protected investment is that they usually require the investment to be tied up for five or six years and the cost of the guarantee reduces the end return to the investor. Despite this, they do have a place for risk-averse investors who are fed up with negligible returns from their bank.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email firstname.lastname@example.org or see www.hillsfinancialplanning.co.uk