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Neptune: rate cut more likely than hike this year

Investors should ignore talk of interest rate rises because the UK economy could weaken further, warns Neptune’s Robin Geffen.

 
Neptune: rate cut more likely than hike this year
 

Far from anticipating an interest rate rise by the end of this year, Neptune Income manager Robin Geffen believes an interest rate cut is more likely.

Following Bank of England governor Mark Carney’s surprisingly hawkish comments last week, markets are now pricing in a 50% chance of an interest rate rise by the end of the year – a scenario that Neptune founder Geffen does not buy into.

‘Frankly where we sit, we find it very hard to believe there is a 50% chance of rate rise this year. I would say…a rate rise is as likely as a rate reduction this year. In fact, a rate reduction is more likely given our concerns about the UK economy,’ Geffen explained.

Geffen made his comments yesterday as the latest PMI (purchasing managers’ index) report showed UK manufacturing cooled last month with growth hitting a three-month low.

Neptune Investment Management’s chief economist James Dowey also viewed an interest rate rise as unlikely because UK inflation has been driven by import prices, attributed to weak sterling, rather than domestic conditions.

‘We expect the Bank of England will look through this inflationary episode, just as it did in 2011 and 2012 when import prices pushed inflation all the way up to 5.2%. As growth slows further over the course of this year, then we expect this speculation of rate hikes to dissipate. We expect to see downward pressure on sterling coming through as we move through the year,’ Dowey explained.

Consumer stretched

The economist is particularly concerned that consumer spending is being squeezed by higher inflation, currently at 2.9%. Meanwhile nominal wage growth excluding bonuses is lagging at 1.7%. The team expect inflation will continue to rise

‘A significant gap has opened up between prices on the shelf and wages in the pocket,’ Dowey added.

Meanwhile, consumer credit has been an important driver of household spending since the Brexit vote. Consumer credit, which includes credit card debt, personal loans and car loans, rose by 10.3% over the year to April. This caused alarm bells to ring at the Bank of England last week, given that real incomes are coming under pressure.

‘Banks were already signalling that they were planning to pull back on consumer credit before the Bank of England made that move last week. Conditions for the consumer will get tougher from here and we think it will be very difficult for it to drive growth forward for the rest of the year – as it has done over the last nine months,’ he said.

With this in mind, Geffen expects to see weakness in the UK economy and sterling from here. As a result, he and deputy manager George Boyd Bowman are avoiding companies that rely on the strength of the UK economy or consumer. Instead, they favour companies with international earnings.

‘We simply don’t believe in this thesis that the housing market will ride on and housebuilders will churn out increasingly profitable new developments. Quite clearly – given the weakness in the housing market and the weakness in the economy – we think that is simply not a good place to be,’ Geffen added.

Over the last few months, the managers sold out of Talk Talk (TALK), WPP (WPP) and Greene King (GNK).

They increased the £208 million fund’s technology exposure after buying Sage Group (SGE). Meanwhile Glencore (GLEN), Smiths Group (SMIN) and BAE Systems (BAES) were added to the portfolio in recent months.

Financial deregulation

The fund managers can invest up to 20% of the portfolio in companies that are not listed in the UK. Here, they are particularly bullish about two US banks – JPMorgan Chase and Wells Fargo. Both names – along with 32 of the country’s other large banks – passed the Federal Reserve’s annual stress test and can now buy back shares and pay dividends.

Boyd Bowman expects US president Donald Trump will succeed at easing regulation in the banking sector because this can happen without congressional approval. Both banks have the potential to benefit from this. 

‘The Trump administration can replace many of the heads of the supervisory bodies, which sets the tone for how regulation is interpreted,’ Boyd Bowman said.

Over the three years to the end of May, the Neptune Income fund has returned 28.5% while the average fund in the UK Equity Income sector has gained 25.1%. It yields an income of 4.7% and pays dividends twice a year.

1 comment so far. Why not have your say?

Alan Tonks

Jul 04, 2017 at 19:12

Very profound, what the Bank of Carney will not do is increase the rate!!!

Hawkish Carney is not, vulture or carrion crow is much closer!!

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