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Schroders warns get ready for default rates to rise

Schroders warns get ready for default rates to rise

Investors can expect a period of volatility when UK interest rates increase this year but long-term the primary challenge facing developed economies is returning productivity to nearer pre-crisis levels, according to Schroders.

Gareth Isaac, Fixed Income fund manager at Schroders, said the level of risk within financial markets has risen, now that the cushioning following the financial crisis was ending, thanks to the predicted increase in interest rates.

A rising interest rate environment will have wide-ranging consequences for financial markets, and companies will have to compete more aggressively for finance.

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Mr Isaac said: “Default rates will certainly rise - even outside the resource sector - and investors should be prepared for that.”

Mr Isaac also said Schroders does not predict a recurrence of the cataclysmic 2008-style ‘credit crunch’ forming in China, but said there were significant risks, with the country now accounting for approximately 17 per cent of global GDP.

He said: “Any material slowdown in the second largest economy in the world would have significant ramifications for the rest of the globe.”

China will continue to grow, he said, but the composition of growth will continue to evolve.

Manufacturing growth is diminishing as a proportion of total growth, and Mr Isaac said the service side of the economy is flourishing.

He said: “The problem for the rest of the world is that the service side of the economy is domestically driven, and thus has a much lower impact on the global manufacturing supply chain.”

In the long-run, according to Mr Isaac, any society’s ability to enrich itself is almost entirely dependent on its ability to increase productivity, measured as output-per-worker or output-per-hour.

He said: “With wages beginning to rise - especially in the US - the primary challenge facing developed economies will be to return productivity to nearer pre-crisis levels.”

Ian Brady, chief investment officer and director at Harpesden, said: “Schroders are talking about what has already happened.

“Before you can get sustainable revenue you need the average worker to feel more secure about his job and pay increase so he can spend. It is a good thing that private sector credit is growing faster than GDP in western levels when debt levels are so high.”