Banking on inflation?

Thomas Buckingham, portfolio manager of the JPM UK Higher Income Fund, discusses UK inflation and what it means for investors.

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Jul 04, 2018

It came as a surprise to many when UK inflation fell to 2.4% in April (based on the consumer price index (CPI)), down from 2.5% in the prior month. 1 Before the data was released, concerns had circulated about the potential for a sharp rise, and a resultant conundrum for the Bank of England, given the sharply increasing oil price, tight labour market and sterling weakness since the Brexit vote in 2016, which has pushed up the prices of imported goods.

Over the last couple of months, a loss of momentum in economic data (albeit still very much in expansionary territory) has already caused the Bank of England to postpone raising interest rates. With inflation on the slide— the market’s expectation of at least two hikes by the end of next year may be challenged.2 What does this mean for investors?


One of the most talked about sectors in relation to inflation (or the lack thereof) is financials, and banks in particular. When inflation increases, rate rises become more likely, and the outlook for banks and their net interest margins (NIMs) (essentially the difference between what they pay to depositors and what they charge borrowers) becomes more positive. Conversely,  if rate rise expectations get pushed out, due in part to lower levels of inflation, the likely impact on banks becomes negative.

The need to be selective in the banks sector is compounded by the steady increase in competition in the mortgage space over the last decade. New entrants in the challenger bank space are competing with the incumbents for share in a mortgage market that has shrunk in volume by 20% over the past decade, from 8.2m households in England with a mortgage in 2007 to just 6.5m today.3

In the JPM UK Higher Income Fund, we select stocks purely from a bottom-up perspective, focusing on fundamentally sound companies with sustainable, high dividend yields. In the financial sector, we continue to avoid several of the pure domestic plays, where interest rate exposure is solely to the UK, and the market environment remains difficult from a competition and pricing perspective. We remain positive on internationally diversified banks such as HSBC, where risks associated with individual markets are lessened, and net interest margins can benefit from rate rises in other markets, such as the US.

Thomas Buckingham is portfolio manager of the JPM UK Higher Income Fund within J.P. Morgan Asset Management's UK Equity team. Find out more about the fund >


[1] Source: Bloomberg; data as of 7 June 2018. [2] Source: HSBC; forecast as of 23 May 2018. [3] Source: HSBC; data as of 13 April 2018.

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Go to the profile of Thomas Buckingham

Thomas Buckingham

Fund Manager, JPM UK Strategic Equity Income Fund, J.P. Morgan Asset Management


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