Editor's comment

High interest rates and inflation are anathema to both bond and equity markets. There are strong signs that interest rates are at or near the peak of the cycle in the UK as well as in the euro-bloc, particularly following the European Central Bank's half-point rise in rates to 4.25 per cent in June. Some commentators say this was a brutal response to data that suggested a build up of inflationary pressures. But the dilemma that faces the ECB is demonstrated by Ireland, which - albeit on the outer rim of the euro-galaxy - is heading towards annual inflation of 6 per cent-plus.

While Alan Greenspan, US Federal Reserve Board chairman, keeps the world's financial markets on tenter-hooks about his view on whether the US economy is cooling fast enough, stock markets in general look set to stay within narrow trading ranges at best. As our global investment strategists say on page 56, equity investors really do have to get used to a lower average return than they have become accustomed to in recent years - although there will always be individual growth and value opportunities.

The last peak in the UK interest rate cycle was in April 1998. The 1999 Equity-Gilt Study by Barclays Capital shows that, had you held a portfolio of gilts throughout 1998, you would have earned a real (inflation-adjusted) return with gross income reinvested of 21.7 per cent, compared with 10.6 per cent from UK equities. It is a sign that if interest rates are close to their peak, the corporate and government bond markets may enjoy a strong second half of 2000.

It means income-seekers could get a capital boost from their holdings as yields fall and demand rises. But investors need to tread carefully in the bond markets. Go it alone only if you know the rules about what affects the prices of bonds in general - otherwise trust the fund managers with proven expertise. A look at the top-performing funds in the relevant sectors on page 100 will help. In the pure bond and gilt sectors (identified by letters D, E and L) a few names stand out across many of the periods we monitor. They are Barclays Global Investors (BGI), M&G, Baillie Gifford and Aberdeen.

If you fancy a mixture of bonds and equities, or international exposure (sectors F, G, H, L and M), the leaders include the above-mentioned, plus ABN Amro, NPI, Marlborough and Newton.




Time for a tax rebate

The Inland Revenue's self-assessment regime, introduced in the 1996-97 tax year, is now cumbersome beyond reason for all concerned. Nine million taxpayers must now turn their minds to working out their tax bill for the last financial year. Taxpayers with chargeable capital gains have the biggest headache. If you want the Revenue to do the sums, return the form before 30 September.

Earlier this year, the Inland Revenue Quality Monitoring Team reported that there 'would be no attempt to monitor or check the accuracy of tax bills'. And Peter Back, an ex-tax inspector who now works as a consultant, says: 'Self-assessment is far too complicated for most people. The Inland Revenue's systems simply cannot cope with the problems that this is causing. This has been exacerbated by staff reductions and IT problems within the Revenue.'

All of this means that taxpayers, bamboozled by the system, could be paying more than they should, while less scrupulous taxpayers may be taking advantage of the Revenue's travails. The chancellor's Budget proposed a ?100 rebate on electronic filing of tax and VAT returns, dressed up as an initiative 'to promote the use of the internet'. It is a tacit admission of the Revenue's failures. Already, the intricacies and timescales laid down for completion of forms and payments have triggered a handsome windfall for the exchequer in penalties, surcharges and interest. Some estimates put this windfall at more than ?1 billion between 1996 and 1999.

The chancellor should consider seriously the calls to simplify the tax system in his autumn statement. While he dithers over what to do with the much larger ?22 billion windfall from the auction of telecom licences, he should consider how to provide a rebate to taxpayers who now require the services of accountants - and stress counsellors.

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