The future for in­ter­est rates: will deep-seated de­fla­tion­ary forces de­feat a US boom?

In­come in­vestors al­ways keep a close eye on in­ter­est rates. How are we to as­sess the con­flict­ing pres­sures at work?

The Daily Telegraph - Business - - Business - Richard Evans Read Questor’s rules of in­vest­ment be­fore you fol­low our tips: tele­ questor­rules; twit­

WHEN are in­ter­est rates go­ing to rise? This ques­tion is never far from the minds of in­come in­vestors, such as those read­ers who fol­low this col­umn’s rec­om­men­da­tions. Only the re­turn of in­fla­tion is likely to cause cen­tral banks such as the Bank of Eng­land to raise rates sig­nif­i­cantly. And the future for in­fla­tion is, in Questor’s view, to be found in a bat­tle be­tween strong but con­flict­ing forces in the global econ­omy.

On the one hand there are deepseated struc­tural trends that could make the cur­rent cli­mate of low in­fla­tion per­sist well af­ter the last re­ver­ber­a­tions of the fi­nan­cial cri­sis have died away.

One of these trends is an ex­cess of in­vest­ment in emerg­ing economies. This can lead to over­sup­ply of var­i­ous goods, which then have to be ex­ported at low prices – in other words, a force for global de­fla­tion. Aid­ing this process are the world’s age­ing pop­u­la­tions and their need to save for their future rather than spend.

And while in read­ers’ minds in­fla­tion may be the norm, over longer pe­ri­ods it has ar­guably been more of an aber­ra­tion.

On the other hand, some econ­o­mists see signs of over­heat­ing in the Amer­i­can econ­omy and pre­dict that the US Fed­eral Re­serve could raise in­ter­est rates far more quickly than ex­pected to pre­vent an in­fla­tion­ary boom.

It is fair to say that there are few signs of over­heat­ing in the Bri­tish econ­omy or in the eu­ro­zone, how­ever.

There is al­ways the pos­si­bil­ity that a dis­or­derly Brexit could spark in­fla­tion here if it caused ster­ling to fall sharply. Al­ter­na­tively there is al­ways the chance of an­other oil price shock. But in ei­ther case, any rise in in­fla­tion should be tem­po­rary be­cause such one-off ef­fects quickly fall out of the year-on-year com­par­isons that in­fla­tion fig­ures are based on.

Questor’s view is that at­tempt­ing to fore­cast the path of in­ter­est rates in light of the num­ber of fac­tors in­volved, and the way in which spe­cific un­pre­dictable events can change things, is a waste of time. We have all seen many pre­dic­tions in the re­cent past proved wrong.

In­stead we aim to pro­tect in­vestors by pick­ing a mix of as­sets that should as a group pro­duce the in­come we want, whether rates are high or low. Some of our hold­ings, such as the banks, should ben­e­fit if rates rise, while oth­ers – bonds and stocks that per­form like bonds – are likely to suf­fer price falls, al­though their in­come should be un­af­fected.

Next week we will look at this point in more de­tail, pre­dict­ing how each in­di­vid­ual hold­ing is likely to per­form in an en­vi­ron­ment of ris­ing in­ter­est rates.

Up­date: ULS Tech­nol­ogy

ULS Tech­nol­ogy, one In­come Port­fo­lio hold­ing likely to ben­e­fit from ris­ing in­ter­est rates, an­nounced an­nual re­sults on Wed­nes­day. The Aim-listed firm acts as a link be­tween prop­erty buy­ers, con­veyancers, builders, lenders and es­tate agents, and more mort­gage bor­row­ers can be ex­pected to switch loans when in­ter­est rates do even­tu­ally rise.

The firm’s turnover in­creased by 38pc to £30.7m in the year to March, and while re­ported prof­its be­fore tax ac­tu­ally fell, from £3.5m the pre­vi­ous year to £2.7m, this was be­cause of an in­crease of £1.4m in the “con­tin­gent con­sid­er­a­tion” for an ac­qui­si­tion. “Un­der­ly­ing” prof­its be­fore tax were 25pc higher at £5.5m.

Net debt fell sharply from £3.5m in 2017 to £1.9m.

On the all-im­por­tant ques­tions of cash gen­er­a­tion and div­i­dends the com­pany said: “The un­der­ly­ing po­si­tion of the group is that it con­tin­ues to turn a sig­nif­i­cant pro­por­tion of its profit into cash, which we ex­pect to al­low pay­ment of a pro­gres­sive div­i­dend, while still in­vest­ing in the growth of the busi­ness.”

It an­nounced a fi­nal div­i­dend of 1.15p, tak­ing the to­tal for the year to 2.3p, which rep­re­sents a yield of 2.3pc at our pur­chase price of 99p in March last year. Nu­mis, the firm’s bro­ker, fore­casts full-year div­i­dends of 2.4p next year and 2.5p in 2020.

Hence the yield will re­main be­low our 5pc tar­get for the fore­see­able future, al­though we bought this stock more for its growth po­ten­tial. The shares have gained 28.8pc since we bought them. Hold.

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