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How equity investors can profit from base rate rise

How equity investors can profit from base rate rise

Mark Barnett, who runs the £10.4bn Invesco Perpetual High Income fund, among other mandates, has revealed the sectors of the UK stock market he thinks will benefit from the base rate increase.

The Bank of England last week doubled the base rate to 0.5 per cent and indicated that it will double rates again to 1 per cent by 2020.

Mr Barnett said the central bank moves interest rates in response not to the current, actual level of inflation, but to what it expects to happen to inflation in the future.

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He said the Bank of England has correctly ignored the recent spike in UK inflation caused by sterling weakness and a higher oil price.

Mr Barnett noted the reasonable economic performance in the UK, coupled with lower unemployment and some wage growth, suggested interest rates should be rising.

The fund manager said concerns about the level of wage growth in the UK economy are misplaced, as the data shows private sector wages increasing by just 3 per cent over the past year.

He said the reason headline wage growth has been anemic, and below the rate of inflation, is that there has been a public sector pay cap.

The fund manager said restrictions on public sector pay are likely to be lifted in the near future, as the political landscape has changed.

Mr Barnett said many equities are priced relative to the 10-year government bond yield, with a low yield on those bonds supporting low growth, low yielding equities.

If inflation and interest rates are rising, particularly if, as he believes, it is because the UK economy is in better shape than many think, then Mr Barnett said the yield on those bonds will increase, making those equities less attractive.

Mr Barnett said many of the low yielding stocks are UK-listed companies with international earnings.

He said he now expects those companies to perform less well relative to shares focused on the UK domestic economy, which benefit more from economic growth.

Mr Barnett said his portfolio has been positioned for some time for domestic shares to outperform, and the UK economy to do better than expected.

Among the largest investments in his funds that are exposed to the UK domestic economy are Next, which is a clothing retailer, and Provident Financial, a consumer lender. 

Paul Mumford, who runs the £151m Cavendish Opportunities fund, said supermarkets are among the companies that benefit from higher inflation as it gives them greater pricing power.   

david.thorpe@ft.com