London money managers bet on UK debt as interest rate hike threatens recession
Money managers in London are scrambling to rejig their portfolios as they brace for a period of longer interest rate pain and potential recession following the Bank of England’s 13th straight rate hike.
The Bank’s monetary policy committee yesterday decided to push the base rate up by 50 basis points to five per cent, the highest level in 15 years, in order to combat stubborn inflation still ripping through the UK economy.
Inflation had been expected to fall more sharply through the summer but City analysts are now predicting a period of higher rates from the Bank of England and a potential recession in the UK.
The move has prompted money managers to overhaul their holdings as they brace for a more persistent high interest rate environment.
“The fastest rate tightening cycle since the 1980s has had profound implications for asset allocators,” Joseph Little, global chief strategist at HSBC Asset Management, told Morning Wire.
“The current situation forces central bankers into a hawkish corner. But, over the coming 6-12 months, investors are set to encounter a shift in the environment toward disinflation and recession. This means that ‘bonds are back’.”
However, Little added that bonds on their own are unlikely to be “enough of a shock absorber for portfolios” and “intelligent diversification” by investors will incorporate real assets like real estate and infrastructure.
“In stocks, the prevailing positive narrative of ‘Goldilocks’ seems likely to falter as a harder economic landing comes into view,” Little said. “That keeps us underweight of global stocks.”
The rate hike move has shaken equity markets in the UK this morning. The FTSE 100 fell as investors dumped stocks in economically sensitive sectors like miners, housebuilders and banks.
UK government bonds tend to perform well when interest rates fall, which causes bond yields to drop. Two-year gilt yields rose yesterday, to hold above five per cent.
PIMCO, the world’s largest owner of government bonds, has said it sees value in UK gilts which will begin to tick up in value as interest rates come down. Daniel Lockyer, senior fund manager at asset manager Hawksmoor, echoed the view, telling Reuters yesterday he was adding index-linked gilts to his funds that would “benefit if rates start coming down.”
The top analyst at money manager Blackrock said the firm also now saw UK government debt as an attractive asset amid recessionary fears.
“We were underweight UK gilts for the past six months, during which yields rose by more than 120 basis points,” said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute.
“But now, following these rises, we find them relatively more attractive than U.S. Treasuries: the cumulative tightening markets expect over the next two years seems too high in the UK, whereas it seems too low in the US.”