Next year the Office of Budget Responsibility forecasts that the UK government will pay £47 billion in interest to its creditors. According to our data all the companies in the FTSE 350 will pay out £76 billion in dividends in 2012. Ignoring any changes to the capital value behind these income streams it would be logical to argue that a typical UK investment portfolio would mirror this split. On that basis the split would be roughly 40% in gilts and 60% in UK equities. Indeed, that is probably a close approximation to many portfolios, whether private or institutional. However, if we start drilling a little deeper we see things are not that simple. We know 40% of UK shares are held by overseas investors so the UK as a whole must be underweight UK equities. That means it might have foreign shares to make up the difference or, more likely, they are overweight in bonds, especially gilts.

All of us are familiar with the trait of running your winners and either grimacing at, or selling, the losers in a portfolio. After the near twenty year bull market in gilts and eleven year bear market in equities it would not be surprising to see most portfolios are now overweight in gilts. Despite the economic storms gilts have been a surprisingly safe haven and have rewarded their owners with impressive capital gains. Moreover, surveying the international scene it is hard to identify a foreign debt market that looks either safer or offers better value.

Whatever happens with the actual notes and coins the divergence in European bond markets has already demonstrated that the concept of a single European currency has failed. Sovereign euro debt is no longer equal and it can only be a matter of time before the realisation that not all euros are equal becomes widespread. There is now significant risk of full or partial sovereign defaults.

If you can’t trust politicians to pay their debts who can you trust?

Apparently moneylenders of old always charged kingdoms more to borrow than fellow merchants. After all, they could always claim their goods in the event of a default or have the miscreants slung into jail. It wasn’t so easy to use such methods on a recalcitrant king.

Maybe the time has come to go back to those valuation…

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