…that was rapidly filled by the Thatcher revolution of a new service-led economy.
Up until the 1970s, manufacturing was the engine room of the UK economy, accounting for close to half of the UK’s gross domestic product (GDP) and employing some seven million people – approximately one third of the national workforce (excluding the public sector). While the historical backdrop is complex, this traumatic change for the UK was a symptom of much wider changes taking place as the world economy itself developed, as a new global dynamic germinated, grew its roots, and developed into what we now call ‘globalisation’.
There were many factors at play in setting the world on a new and vibrant economic course, but the emergence of a liberalised China in the late 1970s from the dark shadows of Maoist communism, combined with the fast-growing internet were key factors that started to open up world markets. This was characterised by free markets and ever increasingly efficient global supply chains, all facilitated by the internet.
What has this got to do with income investing?
Income investing is a strategy of building an investment portfolio to generate a regular stream of income. Over the long term, there was a close correlation between economic growth and the performance of investment markets – in a sense, they are two sides of the same coin. Having set strong global growth in train, asset managers have rightly pursued growth strategies over income investing because, in a relatively high-growth era, growth investing has tended to produce overall higher returns than income investing.
This has become such a deeply embedded mantra that many asset managers would find it hard to challenge this conventional wisdom that so deeply underpins their mindset. Consequently, the market has been slow to realise that the chaotic conditions fundamentally triggered by the war in Ukraine have created the best income investing opportunities we have seen for many years. However, this may prove to be a relatively short-lived opportunity but a major one, nonetheless.
When inflation soared in 2022, forcing interest rates to rise significantly around the world, it triggered steep falls in just about all income-producing investments, principally bonds and property, but also high-yield equity and infrastructure investments. As late as the summer of 2021, the UK Government could borrow over ten years at an interest rate of less than 1%. By October 2022, that had risen to over 4%, where it remains today. Accordingly, bonds issued pre-2022 suffered steep falls of up to 30% – why buy a bond paying less than 1% when you could buy a new bond paying over 4%? The same principle applies to all income-bearing assets, so it has created the opportunity for us to build well-diversified portfolios that can confidently target an income yield of over 4%, not just while bank rates remain at today’s levels, but for several years into the future.
It is clear to see that markets believe that interest rates will decline over the next one to three years, with the first interest rate cut announced on Thursday 1st August. It is therefore possible to invest in assets that will provide yields at broadly the same level as todays interest rates but that will endure and therefore protect against the likelihood of further falls in interest rates, but this opportunity will not last forever.
Over the next few weeks, we will explore in more detail how to take advantage of income investing for ISAs, pensions and other tax-efficient opportunities.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. The content of this email is for information only and does not constitute advice.
