Barings Investment Management slam UK government economic policy

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Category: Featured

Published on Thursday, 06 October 2011 15:41

Written by Will Peters

Put simply, adherence to fiscal austerity (Plan A) is endangering UK Plc.

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An investment update from Alan Wilde, Head of Fixed Income & Currency at Baring Asset Management has urged caution towards UK gilts while slamming the UK government's approach to the economy.

Wilde has the following to say:

"As fixed income investors, we are increasingly concerned about the current course of UK economic policy, and what that means for Gilts.

"The revision of Q2 GDP to just 0.1% leaves growth insufficient to allow the UK to reduce the burden of debt, while today’s signal from the Bank of England that they will resort to further purchases of Gilts is likely to make an expensive asset class even more expensive and add to pension fund deficits. Beyond that, it will reward the international investors who now own over 30% of the stock of outstanding Government bonds – and in all likelihood hasten their exit as they crystallise profits.

"Put simply, adherence to fiscal austerity (Plan A) is endangering UK Plc.

"In a speech to Conservative party delegates this week, Prime Minister Cameron flirted with asking consumers to repay credit card debts, as if those collective actions would somehow restore fiscal probity. In our opinion, quarterly economic growth needs to be closer to 0.5% at least, before debt can be repaid through growth.

"The contradictions in the policy are easy to find. The banks are simultaneously instructed to lend more, de-leverage and improve the quality of their balance sheets.

"Consumers, meanwhile, are exhorted to save more, not to borrow from banks. The corporate sector meanwhile has no need for bank finance – outside the financial sector. What they need is renewed confidence in the economy to generate sales, and that’s likely to remain in short supply in an environment of fiscal austerity.

"This leaves us with a high degree of caution towards the Gilt market in the UK. With yields still close to record lows, and valuations high, it is only a matter of time before international investors realise that the problems of the Eurozone are alive and well in the UK.

"Once the hot money parked in Sterling and the Gilt market in preference to the Euro and Italian, Greek and Irish bond markets takes flight, both Sterling and the Gilt market are likely to see very significant weakness, to the detriment of investors."