On 6th September 2022, Liz Truss became Britain’s fourth prime minister in just over six years. She has seized power in the midst of an energy crisis, with inflation soaring, the pound tumbling, an NHS on its knees, striking workers and Putin flexing his muscles across Europe. So far, markets have not responded well to policies introduced in the short time since she took power. What does the future hold for investors?
2022: Truss’s Britain in crisis
It is September 2022. The markets are in turmoil as the pound has collapsed. And it’s largely down to Chancellor Kwasi Kwarteng’s mini-budget.
Last week, Truss’s chancellor announced £45bn in unfunded tax cuts. The move triggered a record-breaking collapse in sterling. On 26th September, it sunk to its lowest level ever. The cuts have also been strongly criticised by the International Monetary Fund (IMF).
The fallout in the markets has been serious enough for the Bank of England to intervene. On 28th September, it took emergency action to stabilise financial markets by buying long-dated UK government bonds. It did so to ‘reduce any risks from contagion to credit conditions for UK households and businesses’.
The legacy inherited by Truss was never going to be easy, with the UK experiencing rampant inflation, an energy crisis, striking workers, unresolved issues related to Brexit and an NHS on its knees, but now she can add dealing with the very real threat of financial instability to her to-do list. How is she going to tackle all this?
Truss’s headline policies
September 2022’s mini-budget delivered on Truss’s campaign promises (scrapping a rise in National Insurance, cancelling the planned increase in corporation tax and reducing stamp duty) but there was also a major surprise: the abolition of the top 45% rate of income tax.
Truss and Kwarteng argue that the cuts will generate growth and pay for themselves. Critics say the new measures will further line the pockets of the rich while doing very little to ease the economic troubles of Britain’s poorest households. The markets have reacted strongly, and not in a good way.
Truss has already had to backtrack on her no ‘handout’ policy to provide immediate support to households struggling to meet skyrocketing energy bills. Two days after becoming PM she announced a £100bn support package to cap energy bills. Will it be enough?
On a broader scale, renewable energy is not high on her priority list. Instead, the new PM has pledged to cut green levies on energy bills and already lifted a ban on fracking.
There is certainly no indication that conciliation with the EU is on the cards with Truss at the helm. She supports rewriting the Northern Ireland protocol and has pledged ‘to scrap all EU regulation by the end of 2023’. Could she be sowing the seeds of a trade war with Europe?
She seems to favour an equally tough line with other foreign powers, including Russia and China.
Bank of England
During the leadership contest, Truss pledged to review the independence of the Bank of England and potentially limit its mandate. In response, Andrew Bailey, the Bank’s Governor, has warned that maintaining regulatory independence is critical to maintain the UK’s international standing and the competitiveness of the financial sector. He cautions that any review of its mandate could destabilise markets further.
What does the future hold under Truss?
So far, the crashing pound and volatility in the markets are evidence that investor confidence and faith in UK assets have so far plummeted under Truss. Will she be able to build confidence in the UK economy at home and abroad and deliver a much-needed boost from international investors? With high energy prices and slowing global growth, it is going to be a huge challenge, especially with less than two years until the next UK election.
What does it mean for investors?
The uncertain future of sterling is, understandably, a concern for investors. You may be tempted to sell equities that are tanking but doing so will merely lock in your losses.
You may find the graph below reassuring. Despite numerous upsets over the last 35 years, over any period of 10 years or more during that time, the market trajectory has always been upward. And importantly, after shock events which cause tumbling share prices, even the global financial crisis, there has always been a rebound. And that’s exactly what you don’t want to miss out on by selling investments now.
That is one reason why, as ever, we would caution against knee-jerk reactions to what is happening in the markets right now. We urge investors to avoid making decisions based on currency-related predictions, maintain a long-term view and remain diversified.
If you would like to talk through any concerns about your investments, make an appointment for a review with your financial adviser to discuss whether a rebalance of your portfolio would be beneficial.
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