Interest rates across the developed world are at record lows, but not for long. The Fed may have put off raising interest rates across the pond last week, but it is an inevitable case of when not if. The accepted view is that the US will raise interest rates before the end of the year, and where the US leads the UK is sure to follow.
The signs supporting a rate rise in the UK are there – wage inflation has begun to materialise, and inflation will return once the drop in the oil price stops affecting the Retail Price Index.
Some equity investors have warned that once inflation does pick up, those exposed to UK companies should be prepared for the FTSE to falter, but Neptune’s Mark Martin says it is nothing we have not seen before.
“Investors should not worry about interest rates rising – markets have seen rates at significantly higher levels than they are now and survived,” says Martin. “One off political events however are not as predictable. Unique events cannot be included in share price valuation models.”
Bank of England base rate is currently 0.5%, where it has sat since March 2009. But just one year earlier base rate was 5.25%. Yes, loans were significantly more expensive – but cash accounts paid more too. There was, admittedly, far less of a clamour for UK equity income funds, and high yield bonds as high street banks rewarded savers with 8% interest for locking their cash away for just a few years. In the decade prior to 2007, base interest rate ranged from 7.5% to 3.5%, rising and falling every few months.
“Markets have become used to certain interest rate cycles over the past three decades,” said Martin. “Anyone who has invested for more than 10 years will have navigated rising rates.”
What Does Threaten Stock Markets?
That is not to say there are no clouds on the horizon for investors in UK equities. Martin cites the threat of geopolitical uncertainties as a worry – such as unrest in the Middle East causing oil prices to rise, or disruptive politics in the UK leading to higher taxes for the mass affulent.
“Falling oil prices have in effect been a tax cut for the British consumer,” he said. “This economic recovery has been almost wholly driven by consumption, so anything that stresses the UK consumer financially jepodises the recovery, and in turn domestically focussed stocks.”
Martin does still see the greatest opportunities for growth within domestically focussed mid-caps however: “If inflation continues to stay low, and wage growth continues to pick up people can afford to spend more. Stocks such as Carpetright benefit from this.”
