The Daily Telegraph - Saturday - Money
End of an era
What to buy as bonds retreat
‘Inflation will pick up and banks will have to tighten’
Are we coming to the end of one of the biggest and longest bull markets in history? Back in 1980, after the terrible inflation of the Seventies, government bonds (“gilts”) redeemable in 10 years were at a price that provided a yield to redemption of a whopping 16pc. The price of this kind of gilt has since risen so sensationally that they would now bring you a yield of a miserly 1.2pc.
That change in yield – reflecting a mammoth bull market in the price of gilts – is surely one of the biggest shifts in the financial world that will occur in our lifetimes.
It is actually a change that should be celebrated. It reflects how inflation has been brought down over the past 37 years. I suffer from a certain amount of “grumpy old man” syndrome but even I have to admit that this is something that has genuinely got better.
However, it has to be acknowledged that the lengthy downward trend in gilt yields cannot go on forever. At what I believe was the peak of the gilt bull market, a year ago, 15-year gilt prices were so high that they offered a redemption yield of a tiny 0.9pc.
I don’t think we will see that kind of yield again for many a year. The central banks of America, the eurozone and Britain are all moving towards ending so-called “quantitative easing” – increasing the money supply, usually by buying back government bonds.
They have also started – or started to discuss, at least – raising interest rates. Of course, they might change track. It is also true that the downward trend of long-term gilt yields still has not been conclusively broken. But I am expecting that inflation will slowly begin to pick up and then the central banks will be obliged to tighten the money tap.
More government bonds will be for sale and there will be less money around to buy them.
If long-term gilt yields do at last start to rise, what will happen to shares?
Rising interest rates are generally bad for shares. But on past experience, the negative effect will be long drawn out and won’t start for a few years. I think we have entered a period when – as has been true over the past 12 months – shares will do better than government bonds.
I have bought more Randall & Quilter (stock market ticker RQIH), a specialist insurance company, at prices of between 139p and 140p a share. The company seems to be focusing on what it is good at and is forecast to pay a decent yield of more than 6pc. But I have found it difficult to deal in the shares, so have not bought as many as I might otherwise have done.
Dealing is not a problem with Aldermore (ALD), a new bank. I have bought at 223p, at which level they stand at only just over seven times prospective earnings per share. Brokers are expecting the dividend to rise and produce a yield of more than 4pc in 2018.
Communisis (CMS) is a company that organises mailshots and other communications for big organisations such as HM Revenue & Customs. It has had some difficulties in recent years and the share price fell. But the downtrend may have reached the bottom of the trough late last year and there has been some buying by directors.
I increased my stake at 48p per share, a level that represents only 7.5 times the current year’s expected earnings per share. There is also a handy forecast yield of 5.7pc.
Shares in NAHL (NAH), which organises legal help for people who have had accidents, have also been through a bad time, on this occasion because of changes in the regulations. But I am betting that the company is going to adapt its business plan and come through this difficulty. I bought more shares at 130-133p.
In a similar vein, I have increased my stake in STM (STM), which provides specialist pension services to people who move overseas. There has been buying by directors here too. I bought at between 53p and 54.5p.
Finally, I put H&T (HAT), a pawnbroker, on my buy list. It is already solidly on a recovery path but at 279p still stands at a moderate 11.1 times forecast earnings for 2018.
Having done so, I found that these shares had already risen so much that the company was one of my biggest holdings – and I have decided not to put further eggs into this one basket.