FINANCE NEWS: Deflation may create 'double whammy' for charity investors


Charities could face a "double whammy" of sustained falls in both capital value and income of stocks, if the UK enters a period of deflation, investment manager Chiswell Associates has warned.

Chiswell managing director Robert Brown said the concerns among investors about the prospect of war with Iraq and al-Qaida terrorism are neglecting a bigger danger to the health of the stock market caused by negative inflation.

"Deflation happens when there is insufficient demand in the economy and excess supply," said Brown.

"There is downward pressure on profits and companies have to continually cut costs. You could see dividend income being slashed."

Brown said some experts were predicting that there was a one in three chance of Britain entering a period of deflation, similar to the one that has afflicted the Japanese economy for most of the last decade. "We think it is less than that, but charities should be worried about it now."

Yield from equity investments has remained steady despite drastic reductions in the capital value of stocks over the past year which have been described as the third heaviest fall in markets since the Second World War.

Despite high-profile companies such as British Airways reducing dividends to zero, income from shares has held up, making the decline in capital value more palatable to charities.

"The average share yield is 3.5 per cent of income," said Brown. "At the moment with capital value declining, charities are saying, 'we don't like it, but we'll put up with it'. But charities could face a double whammy. They have had the first half declining capital value and the second half could be falling income," he said.

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