Investment Newsletter - July 2014

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Investment Newsletter July 2014

Markets Banking on the Fed By Mike Deverell Investment Manager

We have noted several times before that markets are being increasingly driven by central banks. Monetary policy is one of the biggest risks to both economic growth and to investment portfolios. If they get things only slightly wrong, it could have a big effect. In the UK, we expect interest rates to increase in the relatively near future, late this year or more likely early next year. However, in our view, more important than the timing of the increase is the pace at which they rise. When rates do increase they will probably do so incredibly slowly. Base rate is currently at 0.5% pa and we expect that when it starts to go up it will probably increase in steps of 0.25%, perhaps leaving a six month gap after the first increase and maybe slightly shorter gaps after that.

If rates were to increase on 1 January 2015, we therefore think that by January 2016 they may be at 1% or 1.25%, still very low by historical standard. There are many dangers to increasing rates too quickly. An obvious one is the number of people on variable rate mortgages who have grown used to ultra-low repayments. It might not take huge rate hikes for some people to struggle with repayments. Central bankers are trying to give as much guidance as possible so as not to shock the markets. In the US, the Federal Reserve has now said that quantitative easing will most likely end in October. It is likely that rates would not be increased for perhaps 6 months after QE ends. Whilst forward guidance is helpful in a number of ways, there is a danger that markets may have become too

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the Financial Services Register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission.


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Investment Newsletter - July 2014 by Equilibrium Financial Planning LLP - Issuu