13th November 2015
Investors should stop worrying about a potential rate rise and instead focus on stock selection.
Mark Wharrier, co-manager of the BlackRock UK Income fund, said stock selection was more important to him than policy positioning.
‘The recent growth and inflation figures have prompted further speculation on the timing of a UK interest rate rise,’ he said. ‘We believe this speculation neglects the real story behind these statistics, which is what they reveal about the relative inflation rates for different parts of the economy. This is ultimately far more useful for investment selection than simply using them to predict when rates may rise.’
The latest data from the Office of National Statistics (ONS) showed lower than expected GDP growth – 0.5% for Q3 against the 0.7% predicted, but Wharrier said ‘beneath the headline figures was a far more nuanced and interesting picture’.
‘While the ONS data also showed output in manufacturing and construction fell by 0.3% and 2.2% respectively, the services sector expanded by 0.7% in the three months to September compared to the previous quarter,’ he said.
‘This strength in services was also reflected in the recent inflation statistics, where services inflation – including accommodation, education and culture – was 2.5%, compared to -2.4% for goods inflation. It is clear that the UK’s recovery is not evenly distributed.’
Wharrier applies this data to this portfolio by ‘focusing on those companies where macro trends are benign as well as those companies that are well positioned in their respective markets’.
‘Typically the strongest companies within a sector get stronger while the weak companies will continue to struggle,’ he said. ‘Identifying those companies in the right sectors with strong market positions that are ultimately in control of their own destinies is more important than the impact of an eventual half-point rise in rates.’
However, there are sectors where the trajectory of interest rates is important, such as banking and Wharrier currently invests in a number of banks.
‘While we expect the banks to be beneficiaries if and when interest rates rise, in the meantime we are encouraged by the attractive valuations and sharper focus on shareholder returns as demonstrated by their dividend commitments,’ said Wharrier.
‘In contract we do not own any real estate and utility companies. For these groups, debt levels are high and cash generation under pressure such that we worry about their resilience if and when interest rates rise. Additionally, they trade on premium valuations with limited growth prospects.’
Wharrier said the trajectory of interest rates is important and the most recent and inflation statistics highlight the nuances in the UK economy but there are better ways to stock-pick.
‘In terms of stock selection, a focus on identifying the winners and avoiding the losers in the current UK recovery, rather than the timing of monetary policy, is likely to be more productive,’ he said.