Today we have seen a small negative print for the latest CPI figures in the UK, although I seem to recall the RPI went negative in 2008/9 so it is not the first time we have seen this in recent years. However, personally I am not getting too worried about that becoming entrenched as you have to go back to the 1920's to 1930's to see the last real period of sustained deflation in the UK. I would say that we could have faced a similar depression type scenario and deflation in the last few years if the authorities had not learned from history and cranked up the printing presses this time around with the various Quantitative easing measures etc. However, it does mean we are now in uncharted waters, with huge amounts of debt still outstanding and economies generally being sustained by cash being pumped out by central banks and competitive beggar thy neighbour currency depreciation.
Of course it could be that the Central Banks have just delayed the day of reckoning and the word economy and markets could eventually come crashing down under the weight of all this debt as deflation takes hold. In my view though inflation is more likely to be their chosen route to get rid of the debt over time, which they did quite successfully for a few years in the UK after the 2008/9 recession. So it remains to see if the current deflationary episode turns out to be temporary as Governor Carney suggests (although the Banks forecasting record is pretty poor) or if a deflationary debt spiral is taking hold. No point worrying about these things too much in the short term, so I'm going to continue to invest in the least bad asset class as far as I'm concerned - equities. I believe that will be the best way to protect my capital and income from the ravages of inflation over time, although you have to be prepared to accept some volatility in your capital and income. In the long run we're all dead, but in the meantime I think a decent income producing equity portfolio should do the job for me. If however you believed that deflation was more likely then high quality fixed income and even cash may serve you better as your purchasing power would increase against the falling prices, which might be bad for corporate profits and earnings - witness the food retailing sector recently. Talking of corporate earnings I see we have had final results from one of the UK's major companies and dividend payer - Vodafone (VOD). They themselves continue to struggle with falling prices and the need to invest in their networks and other technologies for the future. Nevertheless they have delivered a 2% increase in the dividend this year taking it to 11.22 pence to give a yield of 4.9% at the price of 229 pence at pixel time. Within the statement they say they are also planning to increase the payment annually as a sign of their confidence in future cash flow generation, although they don't say by how much, although I see forecasts suggest another 2% or so which beats inflation at the moment. In addition this does at least compare favourably with the other major UK stocks like RD Shell and GlaxoSmithKline who have indicated flat dividends in the next few years, but then they offer yields of around 6% and 5.5% respectively. So while Vodafone does not score well on the Compound Income Scores with a score of just 2 - I think this is probably distorted to a certain extent by some of the figures being depressed by all the restructuring and corporate changes like the Verizon demerger for example. Therefore in this case, given their position in the European mobile and fixed line markets, I would do a human over ride and suggest that it would be OK as part of a more broadly based income portfolio, but as I always say you pay your money and take your choice and you should do your own research. Or stick to a cash ISA paying 1 or 2% and see how you get on.
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