Rather, it is just another indication of the confusion and concern that is beginning to creep into markets more generally about whether or not the recovery is quite as robust as first thought.
That is not to say that the recovery in the UK is faltering, indeed that two of the members of the committee are ready already to raise rates can be read as an indication of exactly the opposite of that. But, questions remain about the nature of that recovery and how easily it might be derailed by external factors.
Much of the debate rests on wage inflation, which remains stubbornly low, and when it is likely to start rising.
According to the MPC meeting minutes, the two dissenting voices within the Bank are of the opinion that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up.
“They noted that it was possible that wages were lagging developments in the labour market to some extent. If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising the bank rate in advance of them,” the minutes said.
The other seven members, on the other hand are less worried about that and more worried about raising rates too soon, and disrupting the consumer purchasing that goes to the heart of the recovery.
Indeed, as Rowan Dartington Signature’s Guy Stephens said of the vote decision: “it does suggest that the tide is turning although Carney’s concerns on wage growth are in-line with the US where, similarly, over 70% of GDP is dependent on the consumer.”
Taking that point further, Colin McClean chief investment officer at SVM points out: “The inflation report showed very weak wage growth, it’s a very low quality recovery in terms of the types of jobs it is creating. So, I think, given the strength of the pound, the weakness of some commodity prices and oil, and the poor wage growth, it is not surprising inflation has surprised on the downside.”
If it were just about wage growth, the picture might well be a great deal clearer, but further confusing the picture, however, are the heightened levels of geopolitical tension, which the market is keeping a closer and closer eye on.
According to McLean, the low inflation in the UK is likely to persist especially as, if anything, deflationary pressures have accelerated in Europe and the impact on Germany and other parts of Europe including the UK of sanctions on Russisa have been underestimated.
“These tensions are all symptoms of trade frictions that are not good for world markets. And, I think we are likely to see more of these frictions which could well take the edge off global growth.”
Colin Morton, manager of the Franklin UK Equity Income Fund says: “The UK has, in many ways, been the bright spark of the global economy, responding quickly to government measures, particularly those supporting the housing market, and also being bolstered by a low interest rate environment. That said, the UK could be one of the quickest to be affected by any downside, should there be a reversal in some of these policies; next year’s general election in particular puts a question mark over government policy,” he said on Wednesday.
The implication of this, he says, is that while attractive relative returns remain achievable in the UK over the long term, investors may need to reset their expectations.
“The double digit annual growth seen in a number of sectors over recent years may not be sustainable, particularly in an environment where attractive growth stories are increasingly difficult to find at a reasonable price.”
Jaisal Pastakia, Investment Manager at Heartwood Investment Management told Portfolio Adviser last week that while the group remains heavily invested in equities, particularly within its high risk portfolios, it has trimmed its exposure somewhat. And, in a bid to dial down the risk, the group has moved out of some of its mid-cap holdings into larger, more liquid FTSE 100 stocks.
McLean agrees that moving into larger cap stocks is a way off inoculating a portfolio from liquidity risk. But, he says, the problem with large cap stocks is they are very exposed to global growth. “There is very little they can do but catch whatever growth or deflation is going around.
He is also a concerned that a number of the large caps are likely to cut their dividends as a result of this, adding that this is the reason why the group remains more enamoured with mid-caps.
Mark Burgess, CIO at Threadneedle Investments is a little more optimistic about the fate of dividends saying on Wednesday that he remains overweight UK and Japanese equities.
“UK equities can no longer be regarded as cheap, but an attractive dividend yield continues to provide support. Moreover, the UK remains an attractive destination for global companies to deploy their surplus cash and we expect M&A activity to continue given that many businesses are reluctant to commit to investment capex.”
Be he does add, as a caveat, “One potential headwind is political risk, with the Scottish independence vote looming and a general election due in 2015.”
The HMS Recovery’s voyage continues, but there are a number of geopolitical squalls looming its bows, and in such a scenario you don’t want all the sails out.
