A fund manager has warned that policy mistakes are the biggest economic risk we currently face.
Nick Clay, head of global equity income at Redwheel, said central banks raising interest rates too high, too soon, is a bigger risk to the economy than inflation.
“The effect on inflation from the Russian-Ukraine war is only increasing the risk of policy mistakes," he said.
“We feel we are already late in this cycle, and given that debt has rocketed up for both corporates and governments, the rising rates into a slowing economy will be very difficult for markets and corporates alike.”
Central banks have begun a cycle of hiking interest rates in an attempt to curb soaring inflation.
In the UK, inflation has exceeded the Bank of England’s 2 per cent since May 2021. The figure hit a 30-year high in March, rising 7 per cent.
Commentators have warned of the fine line the BoE has to tread between hiking interest rates to lower inflation, and the impact of a drag on the economy caused by higher rates.
Portfolio focus
Clay said a large part of his global equity income portfolio is made up of high-yielding semiconductor companies, which offer “huge opportunities”.
“The market has become obsessed with a small number of tech companies with overblown valuations, and forgotten about a lot of others,” he said.
“There has been massive underinvestment in chip companies, and there’s now a frantic panic to increase the capacity of chips.
“Semiconductor chip companies such as Qualcomm and TSMC are in a strong position now with pricing power, which is important during times of rising inflation.”
Clay added he also sees promise in the retail sector, with data suggesting we are late in the cycle.
“[This means] that the sectors we would normally look at when interest rates start rising, such as industrials, mining and banks, are not looking attractive."
He outlined how the pandemic caused a cycle in retail, fast-tracking the business models of strong brands with an online offering.
“These businesses are now in a far stronger market position, with far better-balanced businesses and with a strong consumer to sell to.
“They are better placed to weather cost of living increases and a mild growth slow down.”
sally.hickey@ft.com
