UK economic meltdown remains unlikely though, with CPI increasing to 2.7% in May, there are fears that one of the new Governor’s first assignments could be penning an embarrassing public letter to the Chancellor should inflation rise in June over 3%.
Living with inflation is nothing new, of course – CPI has been above the Bank’s stated 2% target for the past three and a half years, with many questioning why it sticks with the target in the first place.
It’s not inflationary fears that have spooked markets – and therefore your funds – this month, but any extension in the Bank’s quantitative easing programme (currently £375bn) certainly has the potential to worry investors.
Shaking things up
Aidan Kearney, co-head of Aberdeen Asset Management’s multi-manager team, suggests that Carney could certainly look to shake things up.
He says: “While Ben Bernanke has certainly put the debate around the withdrawal of stimulus firmly on the table over the past few weeks it is more likely than not that the new Governor of the Bank of England will ensure a continuation if not further extension of stimulus in the UK until he is confident that growth – the key missing ingredient in the battle against the overpowering public debt burden –is both sustainable and entrenched.”
However, with every sign of UK economic improvement – most notably, synchronised positive readings from the Purchasing Manager Index surveys covering manufacturing, construction and services – comes arguments for investors to stick with it.
For Kearney, there is always a difference between economic well-being and the price offered by the market, and fundamentals and sentiment are often not fully aligned. This is reflected in the behind the scenes movements of fund managers who are in many cases it appears beginning again to tilt their portfolios back towards those firms exposed to the domestic economy.
Improving growth
Adds Kearny: “Although the majority of those managers we speak with remain underweight resource stocks in general, which implies an underlying caution towards an overall economic recovery, others have been active in rotating away from the staples space and adding more cyclical names, particularly in industrials, reflecting a combination of cheaper valuations (left somewhat behind by the defensives led rally) coupled with improving growth prospects.
“On the back of this perceived and tentative UK recovery, a number of managers have also been reigning in their international earning stocks and repatriating to more domestic orientated ones.”
We’re someway off being the vibrant economy of yesteryear, but with a change at the top comes new optimism and investors have to play their part too.
On the subject of UK equity funds, yesterday saw the move of another big name fund manager to a new role.
