Investment giants batten down the hatches as inflation soars

By:

City Editor

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Blackrock reported that its assets under management has risen 15 per cent.
Blackrock reported that its assets under management has risen 15 per cent.

Investment giants are braced for rampant inflation and an extended period of rate hikes as the Bank of England warned yesterday the economy is at risk of sliding into recession this year. 

The Bank lifted interest rates to 1 per cent yesterday in a bid to temper a surge in the cost of living, but policy makers at Threadneedle Street warned the economy is likely to shrink in the final quarter of this year.

Some of the UK’s top investors said they were now braced for a period of extended inflation in the UK.

UK chief of the BlackRock Investment Institute, the research arm of the world’s largest asset manager, said the firm was favouring other market equities in the face of inflation and the impact of war in Ukraine.

“We are neutral on UK equities as we generally see large-cap UK stocks as fairly valued, with significant revenue exposure to Europe, where the Ukraine war is hitting economic growth,” said Vivek Paul, UK Chief Investment Strategist.

“We prefer other developed market stocks and are overweight U.S. and Japan equities.”

Threadneedle Street has now hit the benchmark it laid out to begin selling gilts, but Paul said BlackRock remains neutral on UK gilts for the time being.

“The Bank has hit its previously declared threshold to consider actively selling gilts as part of an unwind of its Quantitative Easing (QE) policy, although we do not expect this to occur imminently,” he said.

A surge in energy costs could drive Inflation to ten per cent this year, the Bank of England warned, and investors are now bracing themselves for more rate hikes on the horizon.

Analysts at JP Morgan said the combination of the pandemic and Brexit had “changed the fundamentals of the UK economy” and inflation would persist for the longer term.  

“The Bank will have to keep raising rates to bring inflation down, but a gradual approach, as taken yesterday, is understandable given the nature of the current risks,” Karen Ward, chief market strategist at JP Morgan.

Investors have readied themselves for further rate hikes amidst the cost of living crunch in the UK, and Janet Mui, head of market analysis at Brewin Dolphin, told City PM that yesterday’s rate decision did not change the firm’s strategy.

“We were already underweight bonds in anticipation of higher interest rates and bond yields,” she said.