Has the credibility of the government been lost over the last week?….Time will tell.Over recent days, credibility and trust in this government has been thrown into serious question. The severity of the U-turn after a week when senior Conservative politicians staunchly defended the policies suggests that, while the economic crisis may have abated, the political ramifications may continue. Kwarteng’s mini budget sent a shock wave through the markets, forcing an emergency intervention from the Bank of England, resulting in the pound hitting a record low against the dollar and government bond yields spiking. We have seen since the U-turn, sterling making a strong comeback from its recent lows. The pound was quoted at $1.1208 on the London equities open on Monday 3rd October, compared to $1.1149 at the close on Friday 30th September. However, the rally was short lived. With the UK 10-year gilt yielding just above 4%, a marginal fall on the day, with the financial markets forecasting a lower trajectory for Bank of England interest rates. There has also been a strong call for Kwarteng to bring forward his update on the budget before November. Meanwhile, the market watches closely for further clues regarding the economic direction. If you are already invested, then keep calm as a weak sterling can help some UK investors. If the companies being held report their earnings in stronger currencies like the dollar, euro, or yen and if these shares are rising too, the currency and the appreciation provide a double benefit. Essentially you are owning US dollars, and if the dollar is going up, you’re making money on that. At this time there are some interesting valuations in the UK, and I suspect that some companies will issue trading updates in response to their current valuation, those are the ones to keep an eye on during this very challenging period. Meanwhile, the global story is being dominated by the Fed tightening and a strong dollar. The UK isn’t immune from this but at the same time doesn’t uniquely stand out as being that much worse.
If you would like to discuss your current investments or future plans we would be happy to schedule a call – Contact details for the CFM team are here and my contact details are:
T: 0203 6970561.
Stephen Lovelock, July 2022