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How will investors react to BoE rate rise?

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Investors will look beyond Thursday’s UK interest rate hike of 25 basis points and begin to top-up their portfolios with sectors that are able to maintain margin, according to the CEO of a leading financial advisory and fintech.

The Bank of England lifted UK interest rates to a near 15-year high, with the Monetary Policy Committee voting to raise the Bank Rate to 4.25%, from 4%.

This was the 11th consecutive increase in UK interest rates as the BoE struggles to tame inflation – which rose to 10.4% in February. It takes UK interest rates to their highest since October 2008, almost at the start of the financial crisis.

“There are two key takeaways from the Bank of England’s decision,” said Nigel Green of deVere Group.

“First, the Bank has monumentally failed to control inflation so far, causing misery for households and businesses across the country.

“They failed to act quickly early on to cool inflation. They resisted raising interest rates from near-zero levels for most, even as prices began shooting up due to pandemic-related supply chain snarls, Covid outbreaks and a persistent labour shortage, amongst other issues.

“The UK is still paying for these mistakes,” Green said.

“Second, despite the Bank predicting inflation to fall even more sharply even after Wednesday’s shock number, it’s clear that it will remain an issue for some time to come.

“In this environment, some companies are going to find it difficult to maintain margin and, as such, investors need to be looking at sectors that can maintain margin, despite sticky inflation.”

New sectors

Earlier, Green had suggested that these include healthcare, luxury goods, energy and agriculture.

“Healthcare is a robust sector as people will always need to stay healthy – this has come into focus more than ever since the pandemic. Also, despite wider market volatility, there’s strong earnings potential due to ageing populations and other demographic changes. Plus, healthcare is becoming increasingly tech-driven, which offers fresh opportunities.”

He added that luxury goods can maintain margins due to the inherent aspirational ‘elite and exclusive’ aspect of the sector.

“We’ll look at energy because there’s a shortage of energy in the world right now,” Green said.

“Agriculture is another, as populations in emerging markets around the world are eating more meat. As they eat more meat, there needs to be more grain produced.”

The deVere CEO concluded that there remain two clear ways for investors to maximise returns relative to risk.

“The time-honoured practice of portfolio diversification. A considered mix of asset classes, sectors, regions and currencies offer protection from shocks. And to remain fully and wisely invested.”