Investment Conundrums: Neptune's Geffen And Dowey Warn Things Could 'get Ugly' In The UK

The duo said things could "get ugly" very quickly if the Bank of England (BoE) was forced into raising rates quickly as a result of sustained high inflation.

At the Monetary Policy Committee (MPC) meeting in February, BoE Governor Mark Carney suggested a rate hike would be needed "somewhat earlier" and to a "somewhat greater extent", while subsequently recently released UK inflation figures surprised on the upside, remaining at 3% in January and putting further pressure on the BoE.

"You have had this anaesthetic [of low rates] in the UK over the past decade and, meanwhile, the problems have got worse as people have taken out large mortgages to get on the housing ladder, so we are very vulnerable to rising rates," Dowey said.

"To a large extent, the BoE understands this and knows it cannot raise rates far, but it has taken the view the main impact of Brexit will be to constrain supply, which means rising inflation.

"As a result, they are embarking on this tentative programme of rate hikes to head-off the medium-term inflationary impact of Brexit.

"This makes us even more cautious on the UK outlook as we know the economy cannot take it," he warned.

Any company engaged in low-quality debt, Geffen added, is also not a good place to be as a result of the potential for higher rates.

In particular, the chief executive gave the example of UK property companies, an area he has been avoiding completely since 2014, which he said have been developing at an unsustainable pace as a result of the cheap borrowing rates.

"We saw a number of blow-ups in the UK stockmarket last year, which is reflective of a fundamental weakness in the economy we believe will persist," Dowey said.

On the issue of Brexit, Geffen noted the complexity and  uncertainty of the negotiations was weighing on business investment which, in turn, impacted wider economic growth.

"Every party in the UK is riven on this question of Brexit," Geffen said.

"All the major parties are completely divided, which highlights the complexity of the problem. What we have to do is to steer through the noise because at the end of the day, we are picking stocks not politicians.

"We are very cautious on domestically-orientated stocks and, in particular, cyclical companies as the risks are piling up for them."