INDEX-LINKED GILTS - IS IT THE RIGHT TIME TO INVEST?

As the benefits of cash have slowly subsided, we have been in contact with the Investment Management team at Rensburg Sheppards in order to give our clients alternative routes into the market. Tom Street, Divisional Director for Rensburg was responding to a query regarding Index-Linked Government Securities (Index-linked securities are financial instruments for which the amounts of the coupon payments (interest) and/or the principal outstanding are linked to a general price index, a specific price index or an exchange rate index) . We’d like to share his response with you.

“Whilst the majority of discussion at this stage is in relation to deflation in the economy, we are of the opinion that the measures presently being put in place by the Government will in due course lead to a pickup in inflation, and as a result, Index-Linked securities at this stage merit consideration. Whilst the principal attraction of Index-Linked Gilts is in relation to their ability to maintain capital values in real terms going forward, after the recent falls which you have recently seen in base rates, they are now, I believe, interesting to consider in terms of the income which the generate on an ongoing basis.”

“Typically, gilt-edged securities offer a running yield of approximately 2.5% gross per annum (a rate which compares favourably with many of the building society accounts presently available), with again the added benefit that not only is the capital increased to keep pace with inflation, but also the income return is also increased as and when inflation picks up. As a result of these factors, I do believe that Index-Linked Gilts do warrant consideration if clients are looking for an alternative home for part of their cash balances. I would of course stress that the return of inflation cannot be guaranteed and particularly, if we were to go into a prolonged deflationary cycle, the capital value of Index-Linked securities would decline as a result. However, I do believe that the balance of probability does still remain on the inflationary track.”

If you would like any further information on this, or would like to speak to an adviser please contact us on 0800 018 6020.