The veteran investor believes that it is ‘fair game’ to criticise Bank of England governor Mark Carney for cutting interest rates in the aftermath of the EU referendum result.
Lewis commented that, ‘some central bankers like the limelight, and Mark Carney certainly seems to. He was almost presidential in his response to the referendum, standing at the lectern, he could have been president of the US. He cut interest rates and introduced more quantitative easing at a time when unsecured bank lending was on the increase in the UK. Quantitative Easing and low rates work when banks are in distress, but the UK banks are not in distress.’
He commented, ‘anyone who says they know what is going to happen with Brexit is lying. Both the remain and leave sides lied, they don’t know what is going to happen, we don’t know the outcome of the negotiations, or even the negotiating positions.’
Lewis believes that if consumer unsecured lending continues to increase, the Bank of England will choose to increase interest rates this year in order to prevent another credit bubble forming.
Those who oppose this view would argue that the economic uncertainty around the referendum outcome will lead to a loss of confidence, and that will naturally lead to a decline in consumer demand for loans, meaning that a rate rise would not be necessary.
But if that hypothesis were to prove incorrect, as so far the economic data has been better than expected, and loans were to continue to rise, then the Bank of England might have to lift interest rates.
Lewis is generally critical of the response from policy makers to the financial crisis. He takes the view that quantitative easing increases inequality because it boosts asset prices, and the rich have more assets than the poor. He believes that increase in inequality has caused some of the surprise electoral outcomes of 2016.
If UK interest rates were to rise in 2017, or even the expectation that a rate rise would soon occur were to take hold, then it is likely that sterling would strengthen against most currencies, but not the dollar.
Lewis noted that many share prices in the FTSE 100 have been boosted in recent months because they have overseas earnings which are worth more as sterling weakens. If sterling were not quite as weak, that would be bad for the FTSE 100 and good for UK mid and small cap shares.
He noted that many of the stocks in the FTSE 100 which have risen fastest in recent times are commodity and oil related. He is wary of investing in these, as the investment case is presently predicated on inflation being higher around the world.
But the continuous rise in the dollar and/or a UK interest rate rise were to happen, then inflation would be constrained.
Lewis also believes that policy makers in China have taken the easy option of continuing to stimulate the economy through excessive commodity production, which is creating global oversupply, and will push commodity prices downwards, exporting disinflation around the globe. That is bad for the investment case for commodities.
Gareth Lewis manages around £1.35 billion of investors capital through the Tilney Bestinvest range of multi-asset portfolios.