There is a definite need to raise interest rates in countries such as the US and Europe, according to Invesco’s Richard Batty.
Speaking to Citywire Selector, + rated Batty, who has 10.11% of the Invesco Global Targeted Returns fund allocated to Europe, said underlying inflation has remained subdued and isn’t really picking up.
‘Oil prices have started to fall away very recently, headline inflation will start to moderate a bit. We are of the opinion that there is a desperate need to slow the economies – especially in Europe where there are a lot of markets that are certainly slack.
‘There is a necessity to get a grip of underlying inflation in Europe, so I think the economy is still going down a difficult track and in terms of inflation it’s a bit more subdued than people are thinking.’
Batty also has 5.82% invested in the UK and said the market has priced in the fact that UK inflation is too high, and that it should come down on a 2-3 year view due to the lack of higher sterling and higher oil prices.
‘The impact of the Brexit vote has really come through and markets have cottoned onto the fact that UK inflation is going to be high for some time. But that will be unsustainable because of course, inflation has come through and higher oil prices and higher import prices are really a tax on growth.
‘We have quite weak GDP numbers, but the savings ratio in the UK is now 1.7% and hasn’t been this low since the 1960s. What this means is that consumers, who make up 70% of economic activity are eating into their savings to keep their consumption going.’
With the cost of living continuously rising, Batty said people cannot afford to pay high prices as their wages are not rising to meet this demand.
‘In our mind, this is actually an opportunity as the markets have already found a high inflation rate in the UK and that’s something you want to sell.
‘We are actually short UK inflation. In the US there is the potential for Trump and his policies to try and reflate the US economy, but actually, US inflation is quite low. One of our key ideas at the moment is to be short UK inflation and long US inflation.’
Batty said the team is not particularly bullish on the US economy but said this play is an interesting way to hedge and control the risk in the idea.
‘Obviously if sterling fell again then obviously the markets take a different view and maybe import inflation keeps on rising, which is always a danger with all of these unknown factors.’
Over the three years to the end of May, the Invesco Global Targeted Returns fund returned 9.1% in euro terms. This compares with a 4.4% sector average over the same time period.