How will investors react to Bank of England interest rate rise?
Investors will look beyond today’s UK interest rate hikes and begin to top-up their investment portfolios with sectors that are able to maintain margin, predicts the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations.
The prediction from Nigel Green of deVere Group comes as the Bank of England lifted UK interest rates to a near 15-year high. The Monetary Policy Committee voted to raise Bank Rate to 4.25%, from 4%.
It’s the 11th consecutive increase in UK interest rates as the Bank struggles to tame inflation – which rose to 10.4% in February. It takes UK interest rates to their highest since October 2008, almost at the start of the financial crisis.
He comments: “There are two key takeaways from the Bank of England’s decision.
“First, the Bank has already monumentally failed to control inflation so far, causing misery for households and businesses across the country.
“They failed to act quickly early on to cool inflation. They resisted raising interest rates from near-zero levels for most, even as prices began shooting up due to pandemic-related supply chain snarls, Covid outbreaks and a persistent labour shortage, amongst other issues.
“The UK is still paying for these mistakes.”
Nigel Green continues: “Second, despite the Bank predicting inflation to fall even more sharply despite yesterday’s shock number, it’s clear that it will remain an issue for some time to come.
“In this environment, some companies are going to find it difficult to maintain margin and, as such, investors need to be looking at sectors that can maintain margin, despite sticky inflation.”
Previously, he has suggested that these include healthcare, luxury goods, energy and agriculture.
“Healthcare is a robust sector as people will always need to stay healthy – this has come into focus more than ever since the pandemic. Also, despite wider market volatility, there’s strong earnings potential due to ageing populations and other demographic changes. Plus, healthcare is becoming increasingly tech-driven, which offers fresh opportunities.”
He goes on to say: “Luxury goods can maintain margin due to the inherent aspirational ‘elite and exclusive’ aspect of the sector.
“We’ll look at energy because there’s a shortage of energy in the world right now.
“Agriculture is another one as populations in emerging markets around the world are eating more meat. As they eat more meat, there needs to be more grain produced.”
He concludes: “In this and all environments, there remain two clear ways for investors to maximise returns relative to risk: the time-honoured practice of portfolio diversification. A considered mix of asset classes, sectors, regions and currencies offer protection from shocks. And to remain fully and wisely invested.”