JPMorgan Claverhouse (JCH) fund manager Anthony Lynch believes Bank of England governor Andrew Bailey is talking tough on inflation but that policy makers at Threadneedle Street are unlikely to hike interest rates to over 5% as he warned they might last week.

Speaking on QuotedData’s “In The Hot Seat” show, Lynch said the Bank’s worst-case scenario of inflation hitting 6% as a result of a sustained oil price shock if the Strait of Hormuz does not re-open would leave retail prices rising at less than the 9.6% annual rate they hit in 2022 after Russia’s invasion of Ukraine. From their near zero level after the Covid pandemic, the Bank’s base rate shot up to 5.25% in July 2023.

You can find the interview at 43 minutes into the programme after Lynch’s presentation on JCH.

“Do I think we’re going to get inflation back there with a number of rate increases? I think it’s less likely than it was previously and I think that goes to that point on demand. We have a softer demand environment at the moment. This is a supply side shock rather than demand pull inflation and so I think interest rates are a less useful mechanism to deal with that.”

He added: “I think the Bank of England probably wants to be seen on the front foot and seen to be quite tough because they feel they lack credibility after being behind the curve back in 2021 and 2022 and so I think that’s why they’re putting out a more pessimistic scenario out there.”

Claverhouse, a 4.3%-yielding UK equity income trust, has consistently increased dividends for 53 years, which means Lynch and co-managers Katen Patel and Callum Abbot carefully pick stocks for their dividend growth prospects.

AI curbs inflation

In the video interview, Lynch said there was no sign yet of rising cost pressures impairing UK company dividend payments but cautioned that could change next year if the US was unable to bring its 10-week war with Iran to a close.

“I saw one well-known supermarket retailer last week. They said, as yet, they’re not seeing the cost pressure come through from this. They think their supply chain is a lot better hedged than perhaps it had been in 2022. And, also, the breadth of inflation is not as severe.”

He believed the spike in raw material costs would not transmit into wage inflation. “What we’re not seeing is a broad-based demand environment which means when workers see their costs going up, they’re not necessarily asking their boss for a pay rise. They’re petrified their boss will say, ‘actually I don’t need you anymore, I’ve got AI!’ And so that maybe takes some of the edge off that inflation.”

In the interview, broadcast last Friday, Lynch also discusses how the Claverhouse team:

• bought back into RELX (RELX), Sage (SGE), Experian (EXPN) and Softcat (SCT) when they were oversold on fears of artificial intelligence (AI) competition in February, but have refrained from doing so at London Stock Exchange Group (LSEG);
• is balancing the portfolio to avoid a big bet on interest rates either rising or falling;
• holds a big overweight in financials like NatWest and HSBC banks;
• is frustrated by investors’ negative attitude to a UK stock market offering plenty of growth opportunities with earnings per share forecast to grow 14% this year.

Catch up and watch the interview here.

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