Impact on investors of UK QE3 assessed by Fidelity’s Aruna Karunathilake

With the Bank of England expected to announce further quantitative easing measures on Thursday, Aruna Karunathilake, Portfolio Manager of Fidelity Worldwide Investment’s UK Aggressive Fund assesses the impact on investors.

Given the very high debt faced by developed economies, there are basically two ways out. Governments can choose to pay back debt over a long period of time which is likely to lead to extended periods of sub par growth in certain areas of the economy.

The other option is to inflate away debt through policies such as QE which increases the money supply. In the UK, government policy is still focused on reducing debt, but with bouts of central bank intervention to boost faltering growth.

This makes investing very difficult as it is hard to predict what impact these policies will have in the long term and whether the outcome will be inflation or deflation. The types of stocks that will do well in an inflationary environment are very different to those that are suited to a deflationary environment.

Overseas growth vs domestic growth

I prefer companies selling into markets that are not as burdened by high debts. A company that has a high proportion of sales in emerging markets is likely to do better than one that has a high exposure to the eurozone, or even the UK.

Example: Diageo

Producers of luxury goods

Companies that target the top end of the income scale also look attractive at the moment because these people are less affected by the unintended consequences of recent policy – where stagnant wages and a rising tax burden, along with rising commodity prices, are putting pressure on the squeezed middle.

Example: Burberry

Strength in the US economy

While the US has similar debt issues to other developed economies such as the UK and eurozone, I have a more positive view because of its recent progress in tapping into its vast reserves of shale oil and gas. Being able to reduce its reliance on imported energy will be a remarkable prop to the US economy and makes UK companies with US operations or high exports to the US well placed. Energy intensive companies with US operations could, in time, benefit from significantly lower input costs.

Example: Wolseley

 

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