Photo by Omar Marques/SOPA Images/LightRocket via Getty Images
By Jessica Wee
Less than a month being elected as the Prime Minister, Liz Truss has gone through an atomic start! Let’s look at the timeline:
6 Sept 2022 : Liz Truss sworn in as PM
7 Sept 2022: Sacked Treasury’s permanent secretary, Sir Tom Scholar
8 Sept 2022: Queen Elizabeth II died
19 Sept 2022: End of the 10-day national mourning for Queen Elizabeth II
23 Sept 2022: Chancellor of the Exchequer- Kwasi Kwarteng, announced a mini budget which included GBP45bil in unfunded tax cuts
26 Sept 2022: GBP fell to 1.03 vs USD
28 Sept 2022: Bank of England triggered an emergency GBP65bil bond buying program to stabilize the UK markets
29 Sept 2022: YouGov poll finds the Tories have plunged in popularity, Labour takes 33 points lead
30 Sept 2022: Liz Truss suffered 8 bruising local radio station interviews which resulted in radio silence upon grilling by the presenters
2 Oct 2022: Liz Truss stands by her tax cut plan
What happened after the mini-budget announcement?
1. Bond market- The British bond market went into a whirlwind. The yields (cost of borrowing for the issuer) on 10-year UK government bonds surged after Chancellor Kwarteng’s announcement, rising to 4.3% to 3.5% before stabilizing at 4.05% after BoE’s intervention. Rising bond yields means investors are less willing to buy the bond papers.
2. Stock market – FTSE 100 index fell 232 points
3. GBP as a currency – GBP fell to a record low of 1.03 (from 1.12) vs USD on Monday (26 Sept) after the mini-budget announcement.
3. Impact on lenders – banks had withdrawn 1,621 mortgage products from the market following the uncertainty over the future trajectory of base rates and lack of faith in the Truss government’s plan.
4. Popularity votes – Labour party gained a 33 point lead according to YouGov. This is the largest poll lead held by a political party since the late 1990s.
What is the outlook for GBP and the UK market?
The currency outlook is still extremely volatile and it is unlikely to recover while the government’s unfunded tax plans are still on the table. Stay tuned for the full and detailed budget will be announced on 23 Nov 2022.
GBP weakness against the USD will continue to lurk for some time and this will exacerbate the cost-of-living crisis. Therefore, expect to see further interest rate hikes as a response. Be prepared for a potentially deep and severe recession in the UK.
What should investors with GBP exposure do?
We discussed about the importance of asset allocation in (Building an Ideal Investment Portfolio – My Money Insights)
With a fully diversified portfolio, big moves in currencies will hurt less. Hence, having investments in overseas companies or funds as well as in the UK, can make a significant difference in the long run.
Investors could also use a weak GBP as an opportunity to buy assets that would otherwise cost more. Similarly, UK investors will see the valuations of their assets remain at depressed levels, which could force them to sell if more attractive buying opportunities arise elsewhere.
A weak GBP has also benefited UK exporting stocks like Diageo and Coca-Cola by making their offerings more competitive (although higher inflation will hurt profit margin).
On equities – avoid housing, domestically-focused banks and consumer discretionary stocks that are likely to be among the worst hit.
When more signs of certainty emerge that inflation in the US is peaking, American interest rate expectations and the dollar could quite easily move into reverse. Ultimately, the Federal Reserve will be limited in the extent to which it can raise interest rates if it wishes to avoid causing a recession.
The same could happen in the event we see a receding of the geopolitical tensions that have added to the dollar’s strength.
As the GBP has fallen sharply against the dollar this year, it could rise should expectations change. In any event, your portfolios that have a broad set of currency exposures should stand to be less affected by movements in the GBP.