BlackRock: Investing in a ‘lower for longer’ scenario
Mark Wharrier, co-manager of the BlackRock UK Income Fund, discusses investing in a ‘lower for longer’ interest rate environment.
Since the financial crisis, there has been a dichotomy in markets – if economic news worsened, markets would still strengthen as investors anticipated further monetary stimulus.
The link started to waver when the Federal Reserve deferred increasing interest rate rises in October last year; the market let it be known that it would have preferred the central bank to take action.
It has now become clear that – for the UK at least – that link is decisively broken.
Earlier in January, Mark Carney ruled out any imminent rise in interest rates, swiftly dispelling any lingering expectations that rates might rise in the near-term.
He followed up when he appeared before the UK parliament by saying that Britain’s current account deficit was still a risk to financial stability, due to global instability and a potential ‘Brexit’, and there was a risk that an additional risk premium would be attached to UK assets as a result.
Bad news means bad news
Carney appears unequivocally to be supporting a ‘lower for longer’ interest rate environment. In the past, this would have pleased market participants, who would have welcomed another phase of loose monetary policy, but now it seems bad news really is just bad news.
This has an impact for investors. Although few market participants foresaw any rapid rise in interest rates, Carney had previously said that the case for interest rate rises would be examined more closely at the beginning of 2016, and many still believed a rise this year was in prospect. It makes any significant sell-off in bond markets less likely and suggests that bond yields can remain at or near their low levels.
Back to the bond proxies?
This has a knock-on effect on the equity market. In theory, the ‘lower for longer’ scenario should favour those stocks that have been seen as ‘bond proxies’. For example, utilities have proved relatively defensive in the recent market rout and our zero weight to the sector has hurt relative returns.