EquityOct 16 2017

Miton’s Jane on how UK shares can survive rate rises

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Miton’s Jane on how UK shares can survive rate rises

David Jane, who runs £784m across three multi-asset funds at Miton, has outlined his reasons why he believes the UK stock market can survive higher global interest rates.

The US Federal Reserve has been gradually raising interest rates since December 2015, and the market expects UK interest rates to rise from next month.

Higher interest rates are generally bad for equity markets for two reasons. The first is that higher rates increase debt costs, having the effect of cutting consumer and corporate spending, reducing the level of demand in the economy, slowing growth and revenue for companies.

The FTSE 100 hit a record high on 13 October, as a result of sterling weakness boosting the value of the overseas earnings achieved by UK-listed companies.

Higher interest rates would be expected to boost the value of sterling, which could lead to a downturn in the performance of the FTSE 100.

The second reason is that higher interest rates increase the returns available from cash and bonds, making equities relatively less attractive.

Mr Jane said the pace of interest rate rises is likely to be sufficiently gradual that higher bond yields will be slow to come through, aiding equity markets for some time to come.

He added that increased cash levels for private equity firms is also likely to support equity market valuations.

Mr Jane said: “Private equity has been raising record amounts recently and this money needs to be put to work, most likely by buying publicly listed companies, creating a new marginal buyer.

"There’s a reasonable chance of a spate of takeovers spurring markets on in the coming months, particularly if the buyers think the window of opportunity of financing at ultra-low rates may soon close as central banks continue the slow trajectory of interest rate rises."

He added: "On balance, there are plenty of positive arguments to offset the continuous worries from the pundits, many of whom have been calling for a massive fall right from the start of this long bull market.

"In fact, the market now looks much less dependent on the artificial support from abnormal central bank policy, and much more driven by genuine profit and revenue growth from a strong global economy."

He noted worries about the amount of debt in the world and the effect of interest rate rises on these over-indebted companies.

"As central bankers are more worried about financial instability than they are about inflation, it's unlikely that short-term interest rates will be raised aggressively to fight inflation while debt remains an issue.”

He added that global growth has been picking picking up, which should also boost equity market returns.

Guy Stephens, technical investment director at Rowan Dartington, a wealth manager, said tighter monetary policy has traditionally been bad for equities, but the market has been prepared for rising rates, so the impact should be minimal.

Phillip Milton, who runs Phillip Milton and Co. an IFA firm in Devon, said UK mid and small caps are the area of the UK market that underperform when interest rates rise.

David.Thorpe@ft.com