News & analysis
DEPARTING CARNEY KEEPS BANK OF ENGLAND’S GUN POWDER DRY
Mark Carney’s final act as governor of the Bank of England was a cautious move. Despite worsening macroeconomic data, the Monetary Policy Committee voted unanimously in January to keep rates on hold.
Interest rates remain stable at 0.75% while the stock of corpo- rate and government bond purchases remains constant at £10bn and £435bn, respectively, the committee announced. The decision follows weeks of investor speculation of further rate cuts, amid weakening inflation figures. Ahead of the meet- ing, trading patterns of gilt futures suggested that markets had priced in a 50% change of further easing measures. Early in January, the Office for National Statistics (ONS) announced that CPI inflation had fallen to 1.3%, which is a three-year low and significantly below the 2% target, raising concerns that consumers will continue to hold back on spending. The fall in price levels is partly driven by a decline in accommodation costs and the falling price of services and clothes, as ONS data in December showed. But the main underlying driver for delays in spending is the uncertainty over Brexit as Michael Saunders, a member of the Bank of England’s Monetary Policy Committee, suggested. Outgoing governor Carney warned that a potential slowdown of the UK labour market and a weakening of pay growth could add to deflationary trends.
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While rates remain stable for the time being, keeping the gun powder dry for his successor might have been a factor that affected Carney’s stance. Andrew Bailey, who is set to take on Carney’s position as gov- ernor of the Bank of England in March, will continue to have a debate on his hands. The nine-person strong Monetary Policy Committee includes at least two economists who have already come out with a more dovish stance. Saunders and his colleague Jonathan Haskel voted for rate cuts at recent meetings. Saunders warned in a recent speech in Bognor, Ireland, that sluggish economic growth remains unusual given the extremely accommodative monetary policy environment. The former Citigroup economist sees a case for further rate cuts to stave off threats of deflation. The challenge for the Monetary Policy Committee remains to establish how low interest rates can go, since at 0.75% and with inflation levels of 1.3%, rates are already negative in real terms.
UK CPI Inflation during the past 30 years
CPIH annual rate 00: all items 2015=100; Unit: %
Source: ONS
HEDGE FUNDS SET FOR SUNNY YEAR AFTER A SCORCHING 2019
Hedge funds enjoyed their best year for a decade in 2019, but their performance may not be as strong in the next 12 months, an industry expert has claimed.
A combination of international instability and economic and political uncertainty is likely to tone down hedge fund results in 2020, though the outlook remains positive, Kenneth J. Heinz, president of Hedge Fund Research (HFR), said. “While the core US economy and employment remains strong, the 2020 outlook reflects positive but tempered expectations as a result of rising geopolitical risks and increasing conflict in the Middle East, continuation of trade tariff negotiations and the uncertainty of the US election,” Heinz added.
6 | portfolio institutional February 2020 | issue 90
The HFRI Fund Weighted Composite Index gained 1.8% in December, taking its 2019 performance up 10.4%. This made it the industry’s strongest calendar year since the index surged 20% in 2009 in the aftermath of the financial crash. There were strong gains across equities last year as well as in fixed income, commodity and currency markets, Heinz said. The HFRI Equity Hedge (Total) Index enjoyed its strongest year in 2019 since 2013, climbing 13.9%. Equity hedge (EH) strategies drove hedge fund performance throughout 2019 propelled by US equities, while healthcare and technology dominated EH sub-strategies. “Hedge funds posted the high- est annual performance since the financial crisis recovery, as powerful risk-on sentiment dominated not only in December, but most of 2019, with risk parity and the highest beta strate- gies leading industry gains,” Heinz said.
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