Media

8 March 2012

(London): Commenting on today’s decision by the Bank of England to keep interest rates at the current level, Aviva Investors’ Investment Strategy Director Adrian Jarvis urges investors to think about asset allocation in the light of inevitable future rate rises.
Adrian Jarvis says: “Three years ago UK interest rates were cut to the lowest level on record and today’s decision by the Bank of England to keep them there marks the longest period of unchanged base rates since World-War II.*

“This begs the question of when rates will go up again and pension funds and other investors should not be complacent. Yes, it may still be a way off and we don’t expect base rates to increase until mid-2013, but the Consumer Price Index has been falling and this downward trend is set to continue. Lower inflation will help revive growth and eventually pave the way for a slow normalization of base rates. Given the very low starting point this upward process is likely to be prolonged.”

Jarvis added that this week’s anniversary provides an opportunity for pension trustees to reflect on potential implications rising rates may have on asset classes. Stress testing a scheme’s asset allocation against a range of economic scenarios can highlight dangers and allow for positioning to adjust in advance of changes in sentiment:

“For gilt investors, the point at which interest rates begin to rise may come much sooner than expected. The gilt curve is remarkably flat, meaning that market participants are assuming low base rates for a very long time. The danger for investors is that gilt prices could fall sharply if the market perceives a higher chance of increasing base rates within the next couple of years.”   

However, according to Jarvis the post-2008 economic recovery has failed to match the patterns normally observed in economies and markets, with the relentless backdrop of deleveraging holding back economic growth and adding volatility. Instead of relying too much on historical return and price behaviour patterns, Jarvis says investors should focus on fundamentals to determine how they should adjust their asset allocation, with valuation of particular importance:

 “Understandably, in the current environment investors’ search for yield persists as low interest rates have combined with abundant global liquidity. With this in mind, our forward looking models tell us that equities and corporate bonds look relatively attractive. With investors currently receiving a higher yield from equities than from 10 year government bonds, it is the latter that looks vulnerable. For now government bonds are being supported by the action of central banks. Once this starts to be removed, yields are likely to rise markedly, leading to capital losses on gilt portfolios. I believe now is a good time to begin hedging this risk.”

Jarvis concluded: “The fact is that base rates won’t be going any lower – from here the only way is up. In our opinion, timely asset allocation decisions using forward looking indicators have long been the best way to support long-term investment performance. In light of this, it’s time to start preparing for interest rate rises now, even as base rates hover at a record low.”

- Ends -

For more information contact:
Wendy Svirakova
Corporate Affairs
+44 (0)20 7809 8810

Notes to Editors
* Source: Bank of England

Aviva Investors
Aviva Investors is the global asset management business of Aviva plc. The business delivers investment management solutions, services and client-driven performance to clients worldwide. Aviva Investors operates in 18 countries in Asia Pacific, Europe, North America and the United Kingdom with assets under management of £269 billion at 30 June 2011.

Aviva plc
Aviva is a leading provider of life and pension products in Europe (including the UK) with substantial positions in other markets around the world, making it the world's sixth largest insurance group based on gross worldwide premiums at 31 December 2010.

1. Aviva's principal business activities are long-term savings, fund management and general insurance, with worldwide total sales* of £47.1 billion and funds under management of £402 billion at 31 December 2010.

*Based on 2010 published life and pensions PVNBP on an MCEV basis, total investment sales and general insurance and health net written premiums, including share of associates' premiums.

Aviva Investors Global Services Limited
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Aviva Investors Global Services Limited, registered in England No. 1151805.  Registered Office: No. 1 Poultry, London EC2R 8EJ.  Authorised and regulated in the UK by the Financial Services Authority and a member of the Investment Management Association.
Contact us at Aviva Investors Global Services Limited, No. 1 Poultry, London EC2R 8EJ. 12/0020/-

The information and opinions contained in this document are for use by the financial press and media only, and do not purport to be full or complete. No reliance may be placed for any purpose on the information or opinions contained in this document nor should they be seen as advice.

Unless stated otherwise any opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors). They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature.

This research and asset allocation models have been produced for the internal use of Aviva Investors Global Services Limited only. It is not to be relied on by anyone else for the purpose of making investment decisions.