AJ Bell  

Investments that could do well from base rate freeze

Investments that could do well from base rate freeze

Some investments may do well following news of the Bank of England's decision to leave interest rates unchanged.

Russ Mould, investment director for AJ Bell, said utilities may benefit from their perceived status as a bond proxy and an alternative source of income to government or corporate debt. 

This is partly because expectations for base rate policy influence the yield on offer from the UK's benchmark government bond, the 10-year gilt.

Article continues after advert

He said  “If investors think the Bank of England is going to increase interest rates, then bond yields tend to rise, as investors demand a relatively higher return for lending to the government, to compensate themselves for the admittedly small risk they will not get their money back.

"If Government bond yields rise, then investors will in turn demand a higher yield from utility stocks to justify the risk of buying or holding them – and that means they tend to sell utility stocks.”

This followed the Bank of England’s May Inflation Report decision to leave the base rate unchanged at 0.5 per cent.

Now, Mr Mould believes the Bank of England's studious inactivity could help bond proxies and real estate stocks.

He said: "The Bank of England’s latest policy flip-flop has already hit the pound hard, and may not do much for the Old Lady of Threadneedle’s credibility either, but it could help bring utility and real estate stocks back into focus.

"Both sectors face other challenges – ever-tighter regulation and attempts to stoke further competition in the case of utilities and the threat posed to bricks and mortar retail by online rivals when it comes to real estate – but both have historically done relatively well when the Bank of England has left interest rates unchanged over the past decade."

The 10-year gilt yield fell to 1.42 per cent after yesterday’s (10 May) announcement from Bank of England Governor Mark Carney that the base rate would remain at 0.5 per cent.

 He said: “The drop in government bond yields could make the yield available from utilities seem relatively more attractive.

"Investors may remain wary of Centrica after its November profit warning, with the yield in 'too good to be true' territory but National Grid, given its substantial exposure to US assets, may be an interesting hedge against both a weaker pound and increased regulatory or political intervention in the UK."

Mel Kenny, chartered financial planner at London-based Radcliffe & Newlands, said: "Given the poor economic data that had already come through, the rate freeze was expected and this has already been reflected with a rise in bond prices."