Mercantile Portfolio moves to account for threat of inflation
LONDON 10 FEBRUARY 2011 – The Mercantile Investment Trust, the GBP 1.4 billion J.P. Morgan Asset Management managed investment trust which seeks income and growth from mid and smaller UK companies, has shifted positioning within the portfolio to reflect the potential impact inflation could have on the UK.
Martin Hudson, manager of The Mercantile Investment Trust, has provided his views on UK inflation and interest rates:
“Inflation is something we have been concerned about for some time. Although there is plenty of spare capacity within the UK, the imported inflation which the UK is facing is both increasing and a real problem. Food inflation has been higher than RPI for some time and both clothing prices and mortgage interest payments will only go up from here. Vehicle tax and insurance are up sharply and rail fares and petrol price increases are still to feed through to the official figures.
All this means the consumer is facing a difficult year, with inflation increasing for a lot of everyday items (and taxes rising). Of course, on the other side some inflation can make the debt burden more manageable.
However, companies are not experiencing wage inflation and, in many cases, are passing on raw material price increases to their customers, which is why we are seeing higher inflation figures and why company profits are increasing. The media have also picked up on the threat of inflation increasing the likelihood of UK interest rates rising this year.
The danger is if wage increases start to get out of control - although there is no evidence of this happening yet. One particular area of risk is the public sector where two year cutbacks and wage freezes which may be agreed against a background of 1-2% inflation could prove difficult against a background of 5-6% pa inflation.
We have reflected this in the investment trust’s portfolio by going underweight in sectors such as retailers, leisure and support services and going overweight in sectors such as biotech, telecoms, water and commodities.
The challenge for the Government and for the Bank of England is to maintain confidence in sterling, build on the positive attitude starting to emerge in the private sector, which is resulting in capital expenditure plans being revived, and allow a modest level of inflation which does not spill over into wage inflation. Such an outcome is very positive for mid and small cap UK equities.”
Contacts
J.P. Morgan Asset Management
Jayne Fieldhouse, Media Relations
Telephone: 020 7742 8337
Email: Jayne.e.fieldhouse@jpmorgan.com
Lansons Communications
Lucy Banks
Telephone: 020 7294 3689
Email: lucyb@lansons.com
Notes to Editors
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J.P. Morgan Asset Management is part of J.P. Morgan Chase & Co. and is a global asset management leader providing world-class investment solutions to clients. With US$1.3 trillion in assets under management (the Asset Management client funds of J.P. Morgan Chase & Co. as at March 31st 2011) and offices in 41 locations around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.
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