While many experts think an interest rate rise in the near future is now inevitable, Himsworth says that the UK recovery isn’t stable enough to withstand an increase from the record lows first installed in 2009.“In my opinion, calls for higher interest rates in the UK and US are wrong,” he said.
“Given that there is a huge amount of debt in the private and corporate sectors and certainly at a governmental level, then it must be remembered that, whilst a 0.25 per cent move in interest rates does not sound much, it is massively significant on a borrowing rate of perhaps 3 per cent or 4 per cent – it equates to a rise of over 6.25 per cent on 4 per cent borrowing costs, which is significant when CPI is running at 1.6 per cent or RPI at 2.6 per cent.”
“If the recovery has not truly been established, this could be enough to send us back into a downturn.”
“When one looks at what has actually taken place in the UK over the past few years, there has been massive monetary stimulus and some fiscal boost, and some confidence has crept back into the housing market.”
“I would argue, though, that transactions have come from a stimulus program – ‘help to buy,’ or from significant cash buying in the case of London.”
“Perhaps the economy is more fragile than it would seem, as the level of private savings has fallen, wage growth has been non-existent and demand continues to elude the authorities.”
The manager says that limited inflation pressures make an interest rate rise unnecessary, and potentially dangerous.
“There continues to be limited, if any, wage price inflation, the price of oil continues to drift, standing at $101 for Brent Crude,” he said.
“Further, in the UK, there is no sign of a rise in food prices because of key supporting factors: firstly, the on-going supermarket malaise – with Tesco even cutting their dividend last week to potentially cope with further price investment – and secondly, the likely bumper global harvest that has caused corn, soy and wheat prices to fall 16, 19 and 8 per cent respectively year-to-date.”
“The fundamental problem remains, and this is especially true of the eurozone, that there is only a low level of demand.”
“To persist with pumping in further monetary stimulus, and therefore supply, seems wrong to me. The persistent deflationary pressure – or at least lack of inflation – suggests that we remain at the wrong pricing level; the market in a range of assets wants to move down but the authorities keep trying to push it higher.”
Himsworth says the recent rally in bond prices – which saw the 10 year gilt yield drop from 2.60 per cent to 2.38 per cent in August – could be seen as a warning of a possible rate rise-led downturn.
“A significant amount of buying bonds has clearly taken place,” he said.
Performance of index in 2014
Source: FE Analytics
“In the context of a very slow yet gradual improvement in economic numbers, one would assume investors should not be fearful of deflation or recession.”
“It is also unlikely that these buyers are not seeking yield, and at 2.38 per cent there are better places to find income. The most obvious answer, that I can see, is that investors are seeking safety, taking some risk off the table.”
The manager says there are many reasons to be wary of risk assets besides interest rate rises.
He says investors have been turning a blind eye to the real issues in the market for some time, focusing on monetary stimulus rather than the macro dangers on the horizon.
He paints a bleak picture for the future.
“Markets are, and have been for some time, focused on the monetary stimulus and seem to be ignoring the warning signs and significant geo-political issues,” he said.
“Whilst not significantly impacting energy costs, sanctions against Russia are taking their toll on eurozone countries, which may in time being to impact some UK companies further down the supply chain.”
“It would seem correct that we remain vigilant and aware of the level of risk we are taking, and focus on quality with companies that have some degree of immunity to global risks.”
Himsworth’s flagship City Financial UK Opportunities fund aims to provide investors with consistent long-term returns from capital growth as well as income.
Since its launch in November 2011, the fund has made 56.10 per cent, putting it ahead of the IMA UK All Companies sector, which has gained 49.37 per cent.
Performance of fund and sector since 2011
Source: FE Analytics
The fund has consistently beaten its peers over its short history, delivering top-quartile returns in 2012 and 2013. However, so far this year the fund is behind the sector, losing 3.36 per cent against a 1.57 per cent gain.
Himsworth has a stellar track record over the longer-term, significantly outperforming his peer group composite since February 2001.
Over that period, the manager has made 203.55 per cent for investors compared to just 85.57 per cent from his peers, according to FE Analytics.
Performance of manager and peer group since 2001
Source: FE Analytics
Previous to joining City Financial, Himsworth ran funds at Gartmore and Royal London.
He is set to join Fidelity Worldwide Investment after the firm acquired his £70m fund earlier this year.
