Savings giant dumps UK assets over inflation crisis

Soaring debt levels and uncertainty over sterling bonds make Britain too risky, says Phoenix Group

ONE of the UK’s biggest pensions and savings providers has dumped billions of pounds of British assets over the past year, warning that the Bank of England’s failure to get a grip on inflation had left investors unwilling to back the country.

Phoenix Group, which owns Standard Life, said soaring UK debt levels and uncertainty over inflation meant gilts and other sterling assets were too risky compared with other government bonds, particularly US ones.

Mike Eakins, the company’s chief investment officer, said: “We’ve transitioned billions of pounds out of sterling fixed income, like credit and gilts, into dollars. Taking the same credit risk we can get [better returns] by divesting out of sterling and going into US Treasuries and US investment grade credit.”

Mr Eakins said official figures showing underlying inflation climbed to a 31-year high of 6.8pc in April had “spooked the market”, forcing the City to tear up interest rate predictions and stoking fears that prices will remain higher for longer. The Bank has already admitted Britons face two more years of prices rising above its 2pc target.

April’s inflation surprise has prompted a sell-off for UK gilts as investors predicted that interest rates would need to rise higher than previously expected. Investors now believe there is a 50pc chance the Bank will raise interest rates to 5.5pc. A month ago, markets were betting rates would peak at 4.5pc.

Asked what it would take to make UK bonds attractive again, Mr Eakins said: “We definitely need the inflationary outlook to stabilise. That’s another condition we would need to be piling into UK assets. So the next couple of inflation prints will be really critical to give the market confidence that inflation is coming down.”

He added: “It’s really important to go hard on this in order to get a lid on inflation. This idea that modestly going through a rate hike process and just seeing what happens to inflation – clearly as we saw in the inflation print [for April] – that hasn’t been that effective.”

Mr Eakins’ comments are likely to fuel criticism of the Bank of England, which has been accused of being too slow to act on inflation and to recognise its persistence in the economy.

Phoenix is one of Britain’s biggest investment groups, with £260bn of assets under management.

Gilt yields have been volatile since last September’s mini-Budget, triggering investors to rethink their approach to Britain. Yields, which move inversely to price, on 10-year UK government debt reached a low of 3.3pc in the wake of Jeremy Hunt’s March Budget. However, they have been rising steadily since then as concerns about inflation have mounted.

Yields on 10-year gilts hit a peak of 4.4pc last month and stood at 4.14pc by the close of trading yesterday.

Mr Eakins said Phoenix had started selling gilts “about 18 months ago”, before Russia’s war in Ukraine, suggesting Threadneedle Street has been consistently behind the curve on inflation.

As well as tackling inflation, Mr Eakins said it was also important that the Chancellor continued to focus on getting UK debt on a “glide path” lower in order to minimise a ballooning interest bill.

While Phoenix has been dumping gilts, some investors have seen recent market turmoil as a good time to invest. Bonds issued by the Government are exempt from capital gains tax when they are sold, offering investors a way to keep more of their returns.