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Flat inflation lets Bank of England sit on its hands

Tom Stevenson

Tom Stevenson - Investment Director

In a busy week for home-grown economic data releases, today’s inflation number is the least of the Bank of England’s problems.

Flat inflation lets Bank of England sit on its hands

The unchanged consumer prices index reading of 1.9% is close enough to the Bank’s 2% target for it to carry on sitting on its hands. Interest rates will probably remain unchanged for the foreseeable future.

Today’s announcement follows some robust employment data yesterday, which point towards interest rates rising in due course, and retail sales data tomorrow, which are expected to be weak and so reduce the likelihood of higher rates.

This mixed bag of economic signals illustrates the central bank governor Mark Carney’s dilemma. He wants to get monetary policy back to normal as quickly as possible, but the data is not yet making a firm case for raising the cost of borrowing.

Looking a bit deeper into today’s CPI number, there’s another two way pull going on. The recent rise in the oil price (up by 35% so far this year) has started to push petrol prices higher. Restaurant and hotel costs are also rising. But those positive contributions to higher inflation have been offset by weaknesses elsewhere, such as in food and clothing.

The good news, as far as the UK economy is concerned, is that wages are rising much more strongly than prices at the moment. Yesterday’s 3.5% increase in household incomes means anyone in work is probably getting a little bit wealthier month by month.

The bad news is that with so much uncertainty on the political front, there is a good chance that people will simply save any extra cash. The appetite for big-ticket spending is clearly not there as was clearly demonstrated by house price data this morning showing the first fall in prices in the South East since 2011.

London continues to bear the brunt of the slowdown, with prices in the capital down by 3.8% year on year in February. That was the biggest fall since 2009.

So, what does this flurry of data mean for investors? First and foremost, it means that savers will continue to struggle to find an acceptable income from traditional sources such as government bonds and cash.

That means they will need to keep looking for returns in the stock market. Fortunately, the UK market is so out of favour thanks to Brexit that valuations at home are as cheap as they have been for many years and shares represent good value compared with those safer but lower-yielding assets.

The FTSE 100 index, even after its strong start to the year, offers a 4.3% yield. That compares with just 1.2% on a 10-year UK government bond, or Gilt. Interest rates at 0.75% are unlikely to rise further this year, making deposits even more unattractive.

The Select 50 list of our favourite funds has a good collection of UK-focused funds, with a range of different styles.

Top of many investors’ list (it was one of the biggest sellers in the run up to the end of the tax year on the Fidelity investment platform) is the Lindsell Train UK Equity Fund. Nick Train, its manager, has enjoyed a strong rebound from the difficult market conditions in the last three months of 2018. Since the beginning of the year, the fund has risen by 13%, outperforming the FTSE 100 index which has also enjoyed a strong first quarter. Past performance is not a reliable indicator of future returns.

The Fidelity Special Situations Fund, managed by Alex Wright, is a very different type of fund. More of a contrarian, value-focused portfolio than Train’s fund, which is weighted towards growth and quality, Special Sits has pretty much matched it since the start of the year.

Many investors (this one included) have both funds on the basis that they will normally behave slightly differently and so provide a smoother ride when owned in tandem.

For investors who want to tap into the income attractions of the UK market, the Select 50 offers a few dividend-focused funds.

One of these that has kept pace with the two capital-focused funds is the JOHCM UK Equity Income Fund, managed by James Lowen and Clive Beagles. This fund is chock-full of household names that investors will immediately recognise - its top ten holdings include oil majors Shell and BP, banks such as HSBC, Lloyds and Barclays, and Glencore and Rio Tinto in commodities.

More on:
Select 50
Lindsell Train UK Equity Fund
Fidelity Special Situations Fund
JOHCM UK Equity Income Fund

Five year performance

(%)
As at 31 Mar
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019
Brent Crude Oil -48.3 -32.4 42.2 32.3 0.3
Lindsell Train UK Equity 17.2 4.1 15.7 8.4 12.9
FTSE 100 6.5 -6.6 23.2 0.4 10.2

Past performance is not a reliable indicator of future returns

Source: Refinitiv and Morningstar, as at 31.3.19, in local currency terms with income reinvested.
Fund performance: Bid to bid with income reinvested in GBP. Excludes initial charge.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.