Invest-ability bulletin 05/11/21: Guess when?

The Bank of England leaves markets in the dark on interest rates

You could see the journalist’s face twitch with barely concealed glee when he compared Bank of England chief Andrew Bailey to an “unreliable boyfriend” after the MPC shocked the market by voting not to raise interest rates yesterday. Maybe it wasn’t a full on gotcha moment – nor very original – but it was enough to make the governor squirm for a bit.

And squirm he should. Whether you think now is the right or wrong time to be raising rates, the latest unreliable boyfriend of Threadneedle Street after Mark Carney had done little to dispel the idea that he would be back in time for dinner when in fact he’d intended to stay at the pub until closing all along. Mr Bailey protested that it isn’t the Bank’s job to telegraph its every manoeuvre, squirmily shifting the blame for the surprise onto the market. I thought forward guidance was its job, but there you go.

Either way, it’s certainly not its job to point everyone in completely the wrong direction – a 7 vs 2 vote to keep rates at 0.1% was a long way from the near certainty of a rise most expected and hardly the “close” call Mr Bailey described. As Bank of America analyst Rob Wood put it, “It’s not just that the BoE didn’t hike, they seemed to be singing an utterly different song this month compared to September or Bailey just two weeks ago.” Not raising rates was a proper failure of expectation management and the governor’s credibility has been severely dented as a result, which means the already tricky business of pricing in interest rate moves has just become trickier, even though the governor continues to suggest they are on the way.

Given the near-universal expectations of a rate rise, it was less of a surprise to see what happened on the markets when it did not come. At one extreme banks, which have struggled to generate returns in ZIRPworld and were excitedly withdrawing cheap mortgage products in anticipation of a rise, took a beating. On the other, interest-rate sensitive sectors like real estate whose ever-compressing yields were getting ever-more unattractive, enjoyed a healthy bounce. And the pound tanked, heaping a little bit more inflationary pressure on our import-hungry island – the BoE still expects inflation to hit 5% in Spring next year, meaning real interest rates are going to stay negative for some time, and riskier assets will remain the only game in town to generate a return.

That said, Phil and I are starting to think there’s lots of value lurking on the UK market, not least in BT which we discussed on the podcast this week and which Phil has written up in this free report. Phil’s also been looking at the unloved end of the market in his latest ’52-week lows’ stock screen. And as I wrote this week, I think there’s value in real estate which is nothing to do with interest rates and more to do with the market getting a bit carried away with the Covid “no-one’s ever going to leave their house again” narrative – as Phil writes in this week’s Quality Shares Weekly, story investing can be very dangerous indeed.

Today’s news of a new anti-viral Covid treatment from Pfizer which cuts the risk of hospitalisation by 89% is perhaps the final nail in the coffin of that particular story, and also bad news for the once-high flying vaccine makers, whose shares – Pfizer aside – took a beating today. Not much value in that sector now one suspects, but lots in the “reopening trade” camp, not least Jet2, which Phil wrote about this week as a possible recovery candidate.

I am not even going to pretend to know if there’s any value in banking sector shares, though. After a good run this year, they all look very cheap on many metrics – PE, price-to-book and so on – and the numbers we’ve seen from them over the last few weeks have been very good, with much relief that pandemic-induced loan impairments aren’t nearly as bad as expected.

But the BoE’s hesitancy over rate increases suggests that there are still fears that the economy isn’t strong enough to absorb them, and strong economies are what banks need to prosper – I’d be especially worried if I were an investor in the Asia-focused banks, given the gathering economic storm clouds in China, which some analysts suggest isn’t yet fully priced in and which could trigger a broader economic slowdown. And given their sensitivity to interest rates, an unreliable boyfriend at the BoE isn’t particularly helpful to investors in banking shares – not that much has helped the sector for some time. There are lots of easier things out there to invest in.

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