There is more interest rate pain to come globally and investors need to pay attention to the headwinds, a senior investment specialist at Legal & General Investment Management has warned.
Sonja Laud, chief investment officer at LGIM, quoted former Prime Minister John Major, who once said, 'If the policy isn't hurting, it isn't working', and explained why the LGIM team believed "more pain is to come" with regards to interest rate rises.
Delivering LGIM’s investment outlook for the fourth quarter, she said it was important for investors to understand the interplay between the short-term need to tackle high inflation and what is happening in terms of long-term drivers, such as the geopolitical situation and possible longer-term tail risks.
While she said nobody could predict what might happen, she said investors should be mindful both of where interest rates may continue to go in the short-term, and consider the best long-term positioning for portfolios.
This is all the more important as although UK GDP grew by a meagre 0.2 per cent in August, the full extent of borrowing costs may not be realised yet.
Also speaking at the outlook, Christopher Jeffrey, head of inflation and rates strategy, said while the team expected the current rate hike cycle in the UK had reached its peak, he warned there could still be one more on the cards.
He told attendees: "We have to recognise that while headline inflation is coming down, largely driven by lower energy prices, we still have high wage inflation and inflation is still high in the services sector."
Jeffrey said it was "hard to read the tea leaves" but the Bank of England's monetary policy committee was showing a roughly 50:50 split in terms of whether to do another rise or keep things as they are.
Indeed, other countries have indicated that rate hike cycles are still coming up to their peak, and inflation is still way above its target across global economies, as the below chart shows.
Therefore it was possible there could be "just one more", he said.
"Economic policy has to walk a tightrope" he explained, adding that while the impact of such hikes had largely been priced into the markets, there were still concerns among investors as to what a higher rate environment might mean for portfolios.
He also said that UK banks should "step up" in terms of their gilt buying. Compared with other G7 countries, Jeffrey said UK banks own approximately 5 per cent of the UK gilt market, way below that of other G7 countries.
Laud added that investors should not just think short-term, but consider how to navigate this evolving market landscape and position client portfolios to remain defensive to the current headwinds, while taking advantage of the opportunities available in sectors such as artificial intelligence.
Inflation data
Earlier today (Wednesday 18), the Office for National Statistics revealed September's Consumer Price Index, which showed inflation remaining steady at 6.7 per cent.
