Investments | 21 October 2022
LIZ TRUSS RESIGNS: WHAT NOW FOR MARKETS?
With Prime Minister Liz Truss stepping down after just 44 days, we assess the impact for investors.
They say a week’s a long time in politics, but seven weeks is no time at all to be Prime Minister. It’s the shortest leadership stint we’ve ever had in fact. But while much uncertainty remains in the UK, markets were initially relieved by Liz Truss’s announced departure from Downing Street.
The pound climbed a little against the dollar and UK government bond prices rose (yields dropped) right after the news – both signs of increased confidence among investors. The gains were reversed overnight, reflecting ongoing uncertainty, but the initial reaction signalled a positive market response.
Lilian Chovin, Head of Asset Allocation, Coutts, says, “Markets are relieved Liz Truss isn’t going to cling on to her role and prolong current, uncertain conditions. Obviously, the fact that a Prime Minister had to step down so quickly shines a light on a very shaky political and economic situation in the UK. But it’s likely her replacement will continue to adopt the more conventional plan Chancellor Jeremy Hunt announced earlier in the week, in a way that’s in line with what markets expect.”
MIND THE GAP
That new Prime Minister will have their work cut out for them. The government still has to reduce public spending by around £30-£40 billion a year to help deal with the country’s budget deficit. The Office for Budget Responsibility currently estimates that deficit to be nearly £70 billion.
The move by Chancellor Jeremy Hunt to reverse most of the tax cuts announced in his predecessor’s ill-fated ‘mini-budget’ will have helped – markets and sterling responded positively to that news. But it remains unclear how united the Conservative Party will be behind a new plan with substantial spending cuts.
coutts' view on the uk
We saw challenges ahead for the UK economy earlier this year (although no-one could have predicted this particular political roller coaster) and reduced our exposure to UK stocks and bonds. We also shifted our UK stock holdings toward more global companies.
Lilian says we continue to expect some “domestic pain” in the coming months, maybe even more so now that fiscal support will be more limited.
“We had already moved our UK holdings away from domestic, economically-sensitive stocks,” he says. “We keep an eye out for opportunities, as always, but are being very selective about UK assets.
“On the bond side, there are potential opportunities in the credit space – which was hit hard by the mini-budget but seems to be recovering. We’ll be watching that closely.”
Will recession come sooner than expected?
Initially, ‘Trussonomics’ followed the thinking that tax cuts would pay for themselves by stimulating growth. But then the realisation that they were doing more harm than good led to some belt tightening from Jeremy Hunt.
With that belt potentially about to be tightened further, Lilian says we could see a recession in the UK sooner than expected.
“A recession was always likely to happen, it just might be brought forward,” he says. “But if the government does cut spending, the negative impact this will have on demand could also bring forward the moment inflation and interest rates peak – and see them peak lower than expected. That would ultimately help the economy.”
Markets had already adjusted down their estimates for interest rates. They now think they’ll peak at a little over 5% around May next year, instead of almost 6%.
The value of investments can fall as well as rise, and you may not get back the full amount you invest. Past performance should not be taken as a guide to future performance.