The Bank of England’s decision to cut interest rates to 0.25 per cent and boost QE will give some funds an edge, with corporate bonds, bond proxies and UK large caps set to benefit the most.
Darius McDermott, managing director of Chelsea, says that the move by governor Mark Carney and the MPC has “pretty much thrown the kitchen sink at the problem”.
“From an investment point of view, corporate bonds and bond proxies should all do well as a result of the action, as should our larger UK companies with dollar earnings.
“It should also offer some support to domestically-focused UK smaller and medium-sized companies, which would suffer more in a recession. In contrast, most cash savers will now be losing money in real terms,” he adds.
Adrian Lowcock, investment director at Architas, says equity income funds can benefit amid falling rates.
“Further falls in interest rates will make equity income more attractive. However, investors do need be careful as in 2016 many UK companies have been cutting dividends or paying them out of previous year’s profits,” he says.
He tips the Threadneedle UK Equity Income fund, run by manager Richard Colwell, for its exposure to defensive companies such as pharmaceuticals and tobacco, and its bias to mid cap stocks.
McDermott recommends the Evenlode Income and Standard Life Investments Global Equity Income funds to benefit from the boost to the bond proxies, and from the weaker sterling.
The Royal London Corporate Bond and MI TwentyFour Dynamic Bond are the best funds to benefit from any boost to corporate bonds, says McDermott, as a result of the BoE announcing a £10bn programme of corporate bond purchases over the next 18 months.
The measure of packages announced today has already pushed the pound lower, with it down around 1.36 per cent against the dollar today. This weak sterling presents opportunities, says Lowcock.
“Some UK companies are globally focused and earn much of their revenues in foreign currencies. A weaker pound will boost profits of these UK businesses and the longer the pound remains weaker the better for them. The effects of a weak pound will take some time to come through and be reflected in profits,” he says.
He recommends the Old Mutual UK Alpha fund, run by Richard Buxton, due to its healthcare and oil market exposure, as well as its UK bank focus.
The fall in sterling also means UK companies look cheap to overseas rivals, so takeovers could be a trend that emerges.
Lowcock cites the recent takeover of micro-chip designer ARM by Japan’s Softbank as a sign of this.
“UK companies look cheap to foreign investors due to the weaker currency and possible impact on share prices created by deteriorating economic outlook,” he says.
Paul Spencer, who runs the Franklin UK Mid Cap fund, can benefit from this trend, Lowcock says: “Whilst takeovers are not a primary concern he holds stocks such as IMI and Lancashire Holdings which have been tipped as potential takeover targets over the past few years.”