Inflation Gilts Property and Bonds After Coronavirus Lockdown

Published / Last Updated on 07/05/2020

Whilst looking back and knowing that past performance is not a guide to future performance, we must still try and make rational predictions on what markets will be like after the coronavirus pandemic.

Currently, governments around the world are spending huge sums of money.  We saw this in WWII with the UK owing the USA over £20billion (a massive sum for 75 years ago) and we only finally made the final payment on this debt on 31 December 2006, over 60 years later.  It will take a whole generation to pay debts off from coronavirus.

The US has already committed a $2 trillion recovery fund, Germany €750 billion, Europe more so and in the UK, whilst the Office for National Statistics suggests it will cost £104 billion, we have added the costs up of £14 billion a month furlough pay, £10bn for self employed, £7bn for improved benefits, £13bn hospitality grants, £15bn for small business rates grants and then add on NHS costs, Airline and other future bailouts plus a shrinking of the economy by 14% (that’s a cut of c£308bn), this we estimate could cost the UK £600bn +.  Compare that to £20bn in 1945 – when you think that spending power of £100 in 1945 is the equivalent in purchasing power of around £4,344 in 2020.  This means that our total WWII debt to the US was today’s equivalent of £868bn.    With our estimates of a cost to UK c £600bn for coronavirus, this may likely cost equivalent of a full world war.

The difference is the Bank of England is funding coronavirus so far rather than borrowing from the US – in fact the UK actually owns more US debt than the rest of the world i.e. they owe us.  Central Banks are doing this by simply printing money and government’s borrowing from the people. Billions being pumped into the economy, whilst they have not resurfaced yet, the money will bubble back up and recycle into the economy eventually.  The effect of simply ‘printing’ money is that it devalues the pound even further meaning raw materials, goods, food and services will even more.  This means inflation.

After WWII, the average inflation rate for 60 years was over 5%pa.  Expect the same, gone are the last 20 years of low inflation.    So after coronavirus expect higher taxes, remember in the 50s’, 60s’ and 70s’, basic rate income tax was at 30% for many periods – not the 20% of today.  Expect higher prices, deflation initially and then inflation, wage increases, higher house prices and the spiral effect of that.

We need to plan for inflation:

Consider index linked gilts and funds.  Yes, we know that we will initially enter a recession and deflation immediately after the pandemic but plan for inflation.

Pensions and annuities.  Keep inflation linked pensions.  When retiring, plan for inflation with a combination of inflation linked annuities and if you want flexible drawdown, look for inflation hedged investment funds.

Property.  The knock on effect of inflation is that wages will rise and thus push property prices up.  In the last inflation boom of the 1980s, house prices increased by 180%.  On average they nearly doubled and in many areas they doubled and nearly trebled.  Buy property during the recession to come?

Stock markets.  Expect an immediate bounce back up when a vaccine is found, when people get back to work and then markets to rise fuelled, not by an economic miracle but by inflation.

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