What does the Bank of England Quarterly Inflation Report mean for investors?
In delivering the latest of Bank of England Quarterly Inflation Report, Governor Mark Carney has sought to quash market expectations of an interest rate rise anytime soon by amending previous “forward guidance” which indicated the Bank would only consider raising rates once unemployment fell to 7%.
In so doing, the Bank has essentially messaged that the recovery remains fragile while at the same time notching up GDP forecasts to 3.4% this year. In effect, the Bank is suggesting that while the economy is improving it hasn’t yet reached sufficient “escape velocity” to cope with even a modest increase in interest rates. And for the avoidance of doubt, when rates do rise, they will only do so gradually.
As we have said previously, we have doubts about the sustainability of a recovery that is so heavily anchored to the residential property market and which is being accompanied by high levels of household debt. And today Mark Carney admitted that the recovery is “neither balanced nor sustainable”, with productivity growth continuing to disappoint. Real wages are still below pre-crisis levels, though the Bank expects this to pick up in the second half.
What does all this mean for investors?
With policy remaining accommodative and inflation tamed for now, that should support domestically-orientated equities, so we continue to favour UK mid-caps. Although valuations are far from compelling in this part of the market, these companies should continue to benefit from a cyclical upswing in earnings. We also see increasing evidence that the pick-up in economic activity is benefitting commercial property, with occupancy rates on the high street improving.
Our favoured mid-cap fund is a £70m minnow, the AXA Framlington UK Mid Cap fund, managed by Chris St. John but other funds we like that typically run with a high exposure to mid-caps include Old Mutual UK Alpha, BlackRock UK Special Situations and Standard Life UK Unconstrained Income.
While we favour closed end structures for investments in UK physical properties, the vehicles we like are trading at hefty premiums. We therefore currently favour an open-ended fund, Henderson UK Property, which has a London and South East bias.
Finally, the current domestic recovery comes at a time when traditional corporate bank lending is still constrained and this is providing good opportunities for VCTs to step in and finance smaller companies. These are of course niche investments and only suited to more experienced investors who will benefited from the tax-incentives. For more information on VCTs, visit www.bestinvest.co.uk/vct
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.
Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.
VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCT's are highly illiquid. Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus.