UK markets took a hit last month following an unexpected 0.25% rate rise to 4.75% by the Bank of Eng...
UK markets took a hit last month following an unexpected 0.25% rate rise to 4.75% by the Bank of England (BoE).
However, in its quarterly inflation report released on 9 August, the BoE states the rate rise was necessary to bring CPI inflation back to the 2% target in the medium term, having reached 2.5% in June.
It says: "The Monetary Policy Committee (MPC) noted that, under the assumption official interest rates are to rise in line with market yields, the central projection should be for output growth to remain close to its recent historical average and for inflation to move a little higher before easing gradually back towards the target. Given that outlook, with inflation likely to remain above the target for some while, the MPC judged an increase of 0.25% was necessary."
Peter Lucas, global investment strategist at Ashburton (Jersey), says the MPC's decision was not widely forecast by the market, and this was reflected in the knee jerk reaction from the UK equity market, which immediately underperformed relative to Europe. Alongside this the gilt market also reacted negatively and a firming of the pound was seen, Lucas adds.
"We anticipated UK equity market vulnerability and had taken a short position in the UK, relative to the US, in our higher-risk portfolios as a part of this," he explains. "This is clearly a hammer blow to the UK property market, which had looked like it was picking up again. The UK now has to contend with a double whammy of higher interest rates and a US slowdown. Therefore, it is going to be a tougher economic environment and the property revival will fade.
"For UK sterling, this is as good as it gets. The more rate hikes in the immediate term, the greater the future for economic slowdown. There may be some short-term follow through for investors but sterling is now as overvalued as it ever has been against a basket of major currencies for any time in the last 20 years."
Chou Chong, head of pan-European equities at Aberdeen, sees the recent market volatility as a buying opportunity, particularly for mid-cap stocks. He explains: "Following May's sharp fall in global stock markets, the UK market has range traded between 2,800 and 3,000.
Mixed economic news - stronger retail sales, rising unemployment, export growth and the 0.25% rate rise - has clouded investors' view of the UK corporate. However, we are more upbeat than most investors about the prospects for UK equities.
"At first glance, UK mid-capshares still look relatively expensive compared with their larger counterparts on an average price-to-earnings valuation basis but by excluding blue-chip commodity and banking stocks, a different valuation picture can be seen.
"These companies have posted strong earnings in 2006 so far, helped by huge demand appetite and low interest rates. Eliminating these stocks from the comparison leaves average mid-cap and blue-chip valuations closely aligned, suggesting hidden buying opportunities in both the FTSE 100 and FTSE 250. For investors prepared to do their homework there really are chances to make money, and this should continue in the interim."
BoE raises rates to 4.75%
Equity markets underperform relative to Europe
Volatility could represent a good buying opportunity
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