In his annual Mansion House speech yesterday, Carney made the strongest indication that interest rates could rise as early as this year.
"There's already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced," the governor of the Bank of England said.
"It could happen sooner than markets expect."
The UK market opened in the red, and has steadily trended downwards throughout the day. The pound has also rocketed, hitting the 1.70 mark against the dollar.
Volatility in the FTSE has been very low of late, with today’s shock taking the index to its lowest point in almost two months.
Interest rates have been at historic lows since March 2009, just days after the FTSE hit its bottom in the aftermath of the Lehman crash. Some expect an eventual rise to 3 per cent, which could put a number of mortgage holders under significant pressure to meet their monthly payments, though most think 0.75 per cent is the most likely first step.
Housebuilders have been the biggest losers of the day, with Persimmon down 6.14 per cent at time of writing, Berkeley down 6.08 per cent and Barratt down 5.38 per cent. FE Trustnet recently conducted a study looking at the funds most exposed to a housing market crash, which included the likes of Old Mutual UK Mid Cap, Old Mutual UK Smaller Companies and BlackRock UK.
Carney made a direct reference to the housing market in the speech, saying that it was “showing the potential to overheat".
FE Alpha Manager David Coombs says that findings funds that will benefit from a rise in interest rates is one of his most important jobs as a manager at the moment.
Record low yields on cash have encouraged cheap lending and money has flowed into income-focused investments, all helping to prop up the equity market.
Performance of indices over 7yrs
Source: FE Analytics
Coombs (pictured), who manages the Rathbone Multi Asset Enhanced Growth fund, believes that a rise in rates will mean that investors have to be much more selective in what risk-assets they invest in. “In many ways it’s quite obvious – you need to look at the companies that aren’t heavily indebted,” he said.
“You don’t want companies that are going gangbusters, but those that are growing top-line revenue year-on-year. You’ve got to pay a premium for these.”
“Tech, biotech and US financials tend to do better during rate rises, which is in part why we are overweight the US. The best tech companies tend to be listed there.”
Coombs holds Browns US Equity Growth, Edgewood US Select Growth, Legg Mason Clearbridge US Aggressive Growth and the HSBC S&P 500 Supertracker in Enhanced Growth’s top-10 holdings. They have a combined weighting of almost 25 per cent.
FE Trustnet looked at the funds that are likely to protect investors from a hike in interest rates earlier this month, as well as those that could be hit in a negative way.