The risks and opportunities in a post-rate rise world

After weeks of speculation and analysis, Thursday’s interest rate hike was written off in many quarters as a “symbolic” move by the Bank of England which would have little impact.

A handful cast doubt over whether the rate should have risen at all, labelling it “a bit of a gamble to take when the economy is stuttering” in the words of UBS Wealth economist Dean Turner, and an “odd decision” according to Fidelity’s Anna Stupnytska.

The naysayers point at sluggish growth, pressure on the consumer, high borrowing and low saving rates and Brexit as reasons why the bank may have thought twice about hiking rates, but rise they did and there will inevitably be consequences.

Vanguard’s economist Alexis Gray made a to-the-point statement when she said: “Investors should not fear the rise in interest rates as it a signal that the UK economy is recovering from the financial crisis.”

But is it, really?

"Others, like Invesco Perpetual darling Mark Barnett, have adjusted their portfolio positioning on the back of the decision..."

Growth in the coming years is not even expected to hit 2%, the bank itself predicts GDP rising 1.6% in 2018 and 1.7% in 2019.

With the rest of the world motoring ahead the UK can hardly be said to be “recovering” in any strong sense.

That the Bank of England can spark a debate as to whether raising rates from practically zero is the right thing to do and that two members still voted against a rate rise, is surely a sign that things are not on top form.

What’s an investor to do?

Markets continued to tip toe upwards as Carney made his speech, with the FTSE 100 finishing the day about 0.9% higher, sterling fell slightly and gilts shook but nothing of major consequence.

The slow scuffle forward of the market, which has brushed off shocks with alarming ease, looks set to continue and investors will cautiously move with it, not knowing exactly what to do next.

Some suggest doing nothing at all. Darius McDermott, managing director at Chelsea Financial Services, says: “There is no need for investors to alter portfolios as a result [of the rate rise], and no need for mortgage borrowers to panic. Cash savers may see a small benefit, if banks pass on the rise, but it will be negligible.”

Others, like Invesco Perpetual’s Mark Barnett, have adjusted their portfolio positioning on the back of the decision, expecting a rotation in UK equity markets if further rate hikes come next year.

“It is not difficult to imagine that with some constructive developments in the Brexit process and an acceleration in wage growth, that longer term government bond yields could start rising and sterling could strengthen further,” Barnett says.

“Within the UK equity market, such developments would start a reversal of the sectoral trends that have broadly been in place since mid 2016 – namely the underperformance of domestically-exposed sectors relative to more international areas of the market.”

What to do about bonds, click to page two.

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