Finding positives in low rates environment
Ben Russon, Vice President and Portfolio Manger, UK Equity, Franklin Local Asset Management
While 2015 has proven to be a fairly testing year, we think the UK economy continues to display signs of strength, certainly when compared with other developed economies. Investors around the world are coming to terms with the likelihood that markets are operating in an environment where global interest rates and growth rates are likely to be ‘lower for longer’.
In many ways, it’s a continuation of conditions that investors have been dealing with for a number of years now; however, we think there are some more positive notes to focus upon.
It is true that successive monetary policy meetings in both the United States and United Kingdom have resulted in decisions not to raise interest rates, while the European Central Bank (ECB) has signalled it is considering easing its monetary policy further when its governing board meets again in December.
Quantitative easing (QE) has fuelled equity markets for quite some time, and we are at a stage where equity valuations are elevated against their history, which makes volatility more prominent when you go through the sorts of growth scares that markets experienced towards the end of the summer this year.
When the US Federal Reserve (Fed) does start raising raise rates—whether it occurs at its upcoming December policy meeting or in 2016—we think it would likely continue to ram home the message that any further rate hikes in the United States will probably be very gentle. Ultimately, we expect the peak of the next rate cycle to be far lower than anything we have seen in recent history.
What this means is that even if we do see interest rates rise in the United States and/or the United Kingdom—possibly before the end of this year—it doesn’t necessarily mean equity investors should panic, because we think it is something that can be absorbed.
In the United Kingdom, we don’t feel the Bank of England (BOE) has given much clarity on its interest rate intentions. It seems to be very much in a ‘wait-and-see’ mode.