Investors may be pricing assets badly if they expect UK interest rates to rise quickly, according to a senior economist at Schroders.
Azad Zangana, senior European economist at the fund house, said many UK investors had began to prepare portfolios for interest rates too rise quickly following comments from the Bank of England that indicated upcoming increases.
The economist said the market is now expecting the Bank of England to put interest rates up in May, but he feels it will be much later in the year.
As a majority of the market is pricing an interest rate hike soon, if it doesn’t happen it would likely cause the price of some assets to fall.
He said the improved economic performance of its major trading partners means the UK economy should grow faster than expected in the coming years.
Mr Zangana said he expects the UK economy to grow at a rate of 1.7 per cent in 2018 and 1.5 per cent in 2019. Both of those figures are 0.1 per cent higher than his previous forecast.
He said the improved economic performance of the eurozone and the increased pace of government spending in the US have boosted global economic demand - the only reasons he thinks the UK economy will perform better in the coming years.
Mr Zangana said the likely implementation of Brexit in 2019 means forecasts about the UK economy are more uncertain than normal.
He said he expects the UK and EU to reach a deal, but for there to be tariffs on certain goods. Those tariffs would push up prices, and contribute to higher inflation, he said.
Mr Zangana expects inflation in the UK to pick up later this year as well, due to the slightly better economic performance.
Colin McLean, managing director at SVM Asset Management, said higher interest rates in the UK would have the most impact on equities with a high yield but which are displaying little growth.
He said such shares have performed well because low interest rates have tempted investors to buy any share with an attractive yield, regardless of the growth potential for the company.
Stephen Yiu, who runs the Blue Whale Growth fund, who said consumer staple stocks, such as Unilever, have performed well because they pay an income, and while they have low growth prospects, investors were able to ignore this when there was little growth in the world.
Mike Jakeman, an analyst at the Economist Intelligence Unit, said the UK economy is losing momentum as uncertainty around the UK leaving the EU will create uncertainty and cause the pace of economic growth to slow down in 2018, regardless of what happens in the rest of the world.
David.Thorpe@ft.com
