The Adviser Issue 12 | Page 36

MARKETS REGULATORY & INVESTING EXPERTISE

Income investing in a cooling inflationary environment

Why are interest rates higher today than they were a decade ago ? The reality is that inflation has fallen , but it ’ s still much higher than it has been historically .
Talib Sheikh
Portfolio Manager , Fidelity Multi Asset Income Range

We believe we ’ re in a new regime where interest rates are higher , inflation is likely to be higher , and the coming months and years will require a more diversified approach to multiasset income investing than the previous decade . At the moment , interest rates look likely to fall over the coming years . We don ' t expect them to go back to the zero-interest rate environment that we saw post the great financial crisis . But we do think inflation is on the way down . Central banks including the Fed and the BoE have the opportunity to lower interest rates further from here . Business cycles seem to have become more de-synchronised . If we think back to where we ' ve been over the last year , the Chinese economy has been poor whereas the US economy has performed strongly . In addition , the European and UK economies have been lacklustre and that creates opportunities for asset allocators to try and find value in the disparity . There are two broad components to inflation . The first is goods inflation , which depends on short-term inflation expectations and import prices . There was a big rise in goods inflation in the post- Covid opening , due to the disruption caused to supply chains . To some degree that has normalised , and it could be argued that this has helped drive headline inflation lower . The other part is service inflation - how much people pay for goods and services that are much harder to trade across economies and across borders . That has been falling but remains sticky .

When you look at the Bank of England ( BoE ) or the US Federal Reserve , it ' s services inflation that they ' re worried about , and it ’ s much harder to influence . Closer to home , UK assets have been out of favour with global investors for a prolonged period . The FTSE 100 tends to have companies that are more internationally-focused and earn a relatively large proportion of their earnings overseas . However , UK small and mid-caps typically generate more income from within the UK . It is here that we believe there could be opportunities . In the UK the BoE is cutting interest rates , and we believe that they are showing they can get comfortable with the new government ' s economic policy .
For more information , contact our sales team : salessupport @ fidelity . co . uk
Important information This information is for investment professionals only and should not be relied upon by private investors . Investors should note that the views expressed may no longer be current and may have already been acted upon . Changes in currency exchange rates may affect the value of investments in overseas markets . Issued by FIL Pensions Management , authorised and regulated by the Financial Conduct Authority . Fidelity International , the Fidelity International logo and F symbol are trademarks of FIL Limited .
36 | the adviser