The monetary policymakers in the Bank of England still have not changed the interest rates, even though the August vote by its monetary policy committee(MPC) was very close, just five to four. The question remains: Will the rates still go up or have they reached their peak?
Merrill Lynch UK equity strategist Philip Wolstencroft predicts that both the UK and European markets are likely to go up 1-2% by the end of the year.
Bob Semple, market strategist for the Deutsche Bank, predicts that they might rise a little, but even if they do not they certainly will not go down. He also points to the August vote of the committee, commenting it was “a lot closer than people expected it to be” on the rate increase issue, which he sees as the primary problem of the UK market.
Others see a definite need for a hike in interest rates. ABN AMRO UK economist, James Carrick, forecasts that the pressure on raising the interest rates will effectively mean that there will be “one rate rise this year and two more next year.
According to Semple the MPC is mostly worried about the conflicting messages from the labour market, with some sets of statistics showing that everything is well, while the Confederation of British Industry (CBI) announced in August that pay awards in both services and manufacturing have picked up. Economists are keeping a very close eye on earnings and pay data for signs of inflationary pressure, which might force the bank to raise rates.
The second problem of the UK market is that average corporate profits are not as high here as they are elsewhere. Semple points out that the UK does not have a large IT sector where most of the strongest growth in the world economy has happened.
He also says that “we need clearer evidence of profits going up and to see the interest rates stop rising,” before the market is going to pick up the pace. He believes this could happen by the end of the year.
ABN AMRO sees UK inflation picking up, taking interest rates with it. Carrick puts the inflation figure at 2.9% by the end of next year, which is slightly above the Bank of England target. The bank forecasts inflation changes two years in advance, and consequently “it takes a long time for the interest rates to affect the economy. If the bank sees a threat that could affect the economy in two years’ time it will make a pre-emptive rate hike,” says Carrick.
Market analysts seem to agree that the UK market is going to stay stuck in the middle range without much change until the end of the year. Semple believes that the FTSE 100 shows no signs of lifting and is going to stay where it is at the moment – “bang in the middle”. Wolstencroft agrees saying that it will not rise above 6600 before the end of the year.
Utilities seem to be the favourite of analysts at the moment, oil being on the top of the list. Wolstencroft also sees banks, construction and tobacco as being good, solid investments currently, while Semple points out that he would not favour mortgage banks but those with a rather more international outlook, like Royal Bank of Scotland.
He would also like to see more interest in buying Vodafone and BT but understands the uncertainty about the telecoms sector. Merrill Lynch predicts that there will be a total of $41bn (e67bn) of new telecom bonds issued between September and December, which would mean that the companies will have to raise yields to attract buyer’s attentions while ratings are falling. Investors have taken a defensive in the last few months by stance investing in utilities as the sector is sizable. Semple believes that they will be happy to hold on to those shares.
Media, pharmaceuticals, software and telecommunications are slowing down, according to Wolstencroft, and as they have not shown exciting profits, he would remain neutral on them .
Semple notes that pharmaceutical shares, which have been favoured by the public, are likely to experience some nervousness in autumn as the US presidential election speculation starts. At such times he would also steer away from consumer product stocks as they are at the sharp end.
The UK economy is caught in something of a quandry between the US and the European: as many commodities are priced in dollars and the oil prices are going up, sterling finds itself falling against the dollar.
Carrick sees the Euro-zone growing very fast, partly because of the weakness of the pound and the international commodity prices. He thinks it is likely that the European Central Bank (ECB) will raise its interest rates.
Semple reckons the price of UK government bonds are fair because they have been set for a soft landing. But he thinks they will not change more than 20 basis points either way, which “would not be a big deal: you might as well put your money in a bank.”
Wolstencroft, on the other hand, sees the 10-year gilt yields coming down slightly towards the end of the year.