Government’s quantitative easing carries major inflationary threats, yet the outlook for financial bonds is better than ever, says Artemis

The UK Government’s policy of quantitative easing will bring the cost of borrowing down, but, by pressing the ‘nuclear’ button to re-inflate the market, the government risks inducing significant inflationary pressure, according to James Foster, fund manager of the Artemis Strategic Bond Fund.

“Not only can you overstep the mark and bring too much money into the system, the excess money will dilute the UK currency, weakening it and leading to rising inflation,” he warns.

The warning stems from an interview which has been posted online at the Artemis Film Club. Also interviewed is Adrian Frost, manager of Artemis Income Fund and Derek Stuart, manager of Artemis UK Special Situations.

In the Film Club interview, James Foster also discusses the outlook for corporate bonds, which remains positive since risk is already in the price.

“Yet, the outlook is even better for financial bonds which have already priced extreme risk i.e. that more than 50% of banks will go bust in the next five years. Given the Government’s handling of the banking sector so far, this is a very unlikely scenario,” adds Foster.

The full interview with James Foster, along with interviews with Adrian Frost, manager of Artemis Income Fund and Derek Stuart, co-manager of Artemis Special Situations Fund, is available online at the Artemis Filmclub.

Source: Internal as at 2 April 2009.

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