Andrew Miller
May 23 2007 By Andrew Miller, The Journal
When the Bank of England raised interest rates in January, it caught the markets by surprise. This month, it would have been a much bigger shock if rates hadn't gone up.
After weeks of speculation, the Bank raised rates to 5.5% early in May - the highest for six years. The Bank's move was predictable because of April's troubling inflation report. Consumer-price inflation is now up to 3.1%.
Many think rates could go up and up again - though we are still nowhere near the double-digit interest rates seen in the 1980s.
We do agree that the Bank is likely to put rates up to 5.75% in the summer. Again, this should be no surprise to the markets.
But interest rates tend to move in peaks and troughs. And at the moment, we seem to be climbing up towards the top of a peak.
The next rise to 5.75% - which we think will probably happen in July - could be as high as rates go this time around.
If we are right, and the economy is now near the top of the interest-rate and inflation cycle, there are some patterns in the stock market worth noting.
We have studied what happened to different sectors of the FTSE after the UK's last five interest-rate peaks.
The first peak was in 1979, when rates reached 17%, a level that has never been matched since. There were then smaller interest-rate peaks in 1985, 1989, 1998 and 2000.
In the year after all these interest-rate peaks, some sectors of the economy consistently did well - and some consistently suffered. Star performers were food, beverage and drug retailers, mining companies and the banks.
No matter what happens to the markets, people still need to eat, drink and buy medicine. And the banks have typically been underpriced while paying a high dividend.
Meanwhile, the `cyclical' sectors, such as software, autos and travel, did less well.
This matches our strategy overall. We like the UK stock market at the moment - even though we expect it to cool slightly over the next year.
But we think you are much better off sticking to traditional financial and pharmaceutical stocks rather than volatile sectors. After all, markets, just like central banks, are hard to predict.
