Investment company managers comment on UK interest rate rise

Following yesterday’s Bank of England decision to raise UK interest rates to 5.75%, the Association of Investment Companies (AIC) has collated views from a variety of member investment companies on the potential impact on the UK Stockmarket.

Jeremy Tigue, Manager, Foreign & Colonial Investment Trust PLC, said: “The increase in interest rates was no surprise and there must be at least a 50% chance of a further rise to 6% by the end of the year. I think UK shares, especially those in companies most affected by higher rates, will find it much harder going in the second half of the year.”

Job Curtis, Director of UK Investment Trusts and Manager, The City of London Investment Trust plcsaid: “The interest rate rise is not unexpected and in my opinion is the right reaction to inflationary pressures in the UK economy and the strong growth in broad money. I would expect UK consumer related companies to be under pressure. UK bond prices could also fall further as the market adapts to a period of higher interest rates.”

Simon Gergel, Manager, The Merchants Trust PLC said: “The latest 0.25% increase in interest rates to 5.75% seems to have been anticipated by the stock market. This is reflected in the recent under-performance of many companies which are vulnerable to any potential slowdown in consumer spending caused by higher mortgage costs. The under-performing sectors include retailers, mortgage banks and housebuilders. However the overall stock market has been more stable with particularly strong performances from some of the largest companies like BP, Vodafone, Royal Dutch Shell and BHP Billiton.

“The Merchants Trust has a diversified portfolio with a large exposure to many of the biggest companies which are attractively valued, globally spread and have robust financial structures. Whilst the Trust is not immune from the impact of rate rises on the domestic economy, we are looking to take advantage of any periods of nervousness to add positions in companies with good long term prospects that may be priced too cheaply, as we remain confident of the long term prospects for the UK.”

Stephen Porteous, Senior Analyst, Alliance Trust PLC said: “The Bank of England, through short term interest rate rises, is attempting to engineer a modest slowdown in domestic demand to meet short and medium term inflation targets. With property prices remaining firm and consumer spending remaining robust, the policy so far this year hasn’t really worked and a consecutive ¼ point rise was felt necessary.

“While the general health of UK corporates remains strong, in the short term we are wary of investing in those companies exposed to slowing consumer spend across the economy. The renewal of fixed rate mortgages taken out two years ago at lower interest rates, as well as continuing cost pressures such as the prices of petrol and food, should induce quite a sharp slowdown in consumer spend.

“The rise in interest rates should be kept in context however. Real interest rates remain low and corporate cash flows and balance sheets remain strong. We expect economic data to show evidence of the recent interest rate rises starting to bite and while we cannot rule out a further rise, we remain positive on economic prospects and the outlook generally for the corporate sector.”