The Bank of England may be reaching the end of its rate-rising cycle. It may be time to look at some of the sectors that have struggled.
- The greatest beneficiary of the changing in UK interest rate expectations has been the IT growth capital sector
- The recent revival for the sector has almost all come from a narrowing of discounts
- Another early winner from shifting interest rate expectations has been the property sector
While the Bank of England has been careful to suggest that further interest rate rises remain possible, the decision to pause for the time being feels significant. If this really is the end of the rate rising cycle, there are some areas that might be ripe for a reappraisal. Some have started to move already.
Top of the list should be the UK smaller companies, which have been in the eye of the storm. Mix in private equity and they have been even worse. It is no surprise that the greatest beneficiary of the changing in UK interest rate expectations has been the IT growth capital sector, which is up 12.9% in share price terms over the past three months.
The performance of the Schroder British Opportunities fund, which blends public and private equity, has been typical of funds in the sector. Its NAV performance has been reasonably stable – up 0.1% over the past 12 months - but its discount has moved from near zero in September 2022 to over 35% in June of this year. Investors have become increasingly nervous on private equity valuations, while publicly-listed smaller companies have derated.
The recent revival for the sector has almost all come from a narrowing of the discount – back to 28% for the Schroders trust. Yet discounts remain wide by historic averages – 44% for Baillie Gifford’s Schiehallion Fund or 52% for Chrysalis. The same might apply to the growthier end of the UK smaller companies sector, where discounts are still wide. The Chelverton UK Growth trust, for example, sits on a 46% discount. Private equity may also be a beneficiary. After a long period out of favour, these trusts may be due a reappraisal if the interest rate cycle is turning.
The other early winner from shifting interest rate expectations has been the property sector, notably UK logistics. While there are undoubtedly still problems in parts of the commercial property sector – the office sector, for example – generalist commercial property trusts are on significant discounts. The abrdn Property Income Trust Limited is still on a 42% discount for example, while the UK Commercial Property Reit is on a 33% discount.
The interest rate environment is still fragile. Rising energy prices could swiftly derail the progress that has been made on inflation and the Bank of England may change its mind once again. Nevertheless, for those who believe that the cycle is turning, there are some unloved opportunities to explore.
