The new policy of forward guidance and low BoE base rate means UK investors have few options outside equity income and corporate bonds.
Last week I received a most unexpected request. Did I know anyone who might be able to effect an introduction to the new governor of the Bank of England Mark Carney?
Following the interview the new governor gave to BBC Radio 4’s Today programme, he was described as “hitting the ground running” and of being the third most influential person in terms of government policy after the Prime Minister and the chancellor. As such he is likely to play a significant role in determining how markets behave. Certainly, the indication that interest rates may stay low for longer will need to be factored into investment planning. I won’t reveal the name of the person who asked me – nor why, as it is quite likely they will read this publication – but aside from feeling suitably flattered, it did make me reflect upon the considerable impact Carney has had in a very short space of time.
The introduction of forward guidance, something that George Osborne favours, should in theory make forecasting likely investment outcomes that much easier. I rather suspect that it will actually turn out to do nothing of the kind but certainly some sectors seem certain to be affected as a result. Buy to Let is expected to prosper if mortgage rates remain low, which in turn seems likely to underpin the better tone to house prices.
Then there is the bond market. While I continue to consider low yielding government stocks poor value, given current inflation levels, corporate bonds, with their higher returns, look to have a place in many portfolios. Indeed, finding adequate income continues to be a challenge for those tasked with constructing portfolios, with higher yielding large capitalisation stocks having been driven up in price, restoring the fortunes of many UK equity income funds.
This prolonged period of negligible returns on cash deposits has created all sorts of problems for traditional savers. Annuity rates continue at unattractive levels while even premium bonds have had the amount of money allocated to prizes cut.
If unemployment is to be a key driver of interest rate policy, as our first taste of forward guidance suggests, then we will need convincing signs that economic growth has been properly restored before cautious savers can expect to receive a decent return on their cash.
While recent signs have been encouraging – industrial output up, service sectors buoyant, construction improving – nobody is expecting a rapid return to pre-credit crunch growth levels, so the suggestion that low interest rates will be around for some time looks far from fanciful. For those seeking a higher income, perhaps there is merit in looking at those funds adopting a multi-cap approach to portfolio selection as there is arguably better value in those smaller companies likely to be a beneficiary of an improving economic background.
Whether Mark Carney turns out to have that magic touch that can restore the fortunes of the financial sector, only time will tell. What we do have, though, is a central banker prepared to be more open on what is going on and which policies are likely to be adopted. He is also keen to put his stamp on those areas that fall into his sphere of influence, as his warning to banks demonstrates. The next eight years could prove interesting.
Meanwhile, interest rates look set to fall in China, which last week announced a more moderate inflation rate and better than expected manufacturing numbers. At 2.7 per cent, China’s CPI is still high compared with the US but less than elsewhere in the region. And growth is continuing, something which no longer appears to be the case in India, which is also suffering much higher inflation.
Emerging markets need to be watched carefully these days.
Brian Tora is an associate with investment managers JM Finn & Co