M&G: Buy Gilts Only if they are Inflation-Linked

The UK will be inflationary in the future, says Jim Leaviss, head of retail fixed interest for M&G. Investors should prepare for inflation of up to 3%

Karen Kwok 19 September, 2016 | 10:52AM
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UK inflation will rise over the next two years, according to M&G – surpassing the Government’s target of 2%, potentially hitting 3%, thanks to weak sterling and a more stabilised oil price.

The UK will be inflationary in the future, Jim Leaviss, head of retail fixed interest and manager of the Silver Rated M&G Global Macro Bond fund said at an investor conference in London on Friday – creating an attractive buying opportunity in short dated inflation-linked bonds.

“And finally maybe, increase in wages might start to come through as well,” said Leaviss. The unemployment rate in the UK remains at a low level following the economic recovery of recent years, and wage inflation is the next natural step.

ECB Will Keep Rates Low for a Long Time

There is a long way for interest rates to go up in Europe, according to Leaviss. Despite a recent stabilisation in policy, he believes the European Central Bank may have to cut interest rates further or tighten monetary policy again.

“It is unlikely to see further significant cut in European interest rates but there might be one or two small cuts, maybe 20 basis points, but nothing as big as what we have seen so far,” he said.

“They are going to realise that easing hurts banks too much, as you can see from the downward movement in bank’s share prices, which is damaging bank’s profitability.”

Any macroeconomic shock, which could send the countries of the European Union into a deflationary environment, would impact European interest rate decisions. These shocks could include a “hard landing” of the Chinese economy, or a shock result in up-coming European electon where far right parties are fighting to gain votes among disillusioned voters. However, Leaviss does not see the US presidential election a huge impact on European bond yields.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk