Although a much more expansive fiscal policy was well flagged by Liz Truss during the Tory leadership roadshow, it appears that most market participants were still surprised by the scale of the moves announced in Kwasi Kwarteng’s ‘budget that wasn’t a budget’ last Friday, with UK Gilts and the domestic currency coming under significant pressure over recent sessions. The yield on the 10 year UK Gilt has now risen from 1.7% back in March to over 4% at time of writing, with mortgage providers temporarily removing products from the market place as they struggle to make sense of likely longer-term funding costs. Interest rates have of course been far too low for far too long, with the Bank of England (and other central banks) too complacent in their previous assessments that inflation was “transitory” in nature, notwithstanding the exogenous and unforeseen impact of the Ukraine war.
Investors are now scrambling to re-assess the correct valuation of assets as diverse as high growth stocks, corporate bonds, infrastructure assets and commercial property against a backdrop of fast rising interest rates. The prices of many such assets have fallen sharply over recent days as market-makers slash prices to deter selling. Global investors generally continue to shun UK assets, particularly equities which remain cheap compared with global peers. Opportunistic takeovers continue however, with waste group Biffa the most recent to fall prey to a US acquirer taking advantage of dollar strength; such activity could well accelerate further should the pound remain weak.
With UK Gilt yields at 4% per annum it is unsurprising that property stocks, infrastructure operators and other alternative income producers have seen share prices fall over recent days in a sudden re-pricing of yield. It should be remembered however that the income from most corporate and government bonds is fixed once such have been purchased, whereas property, infrastructure and quality UK companies offer the potential not only for a comparable initial yield, but more importantly the prospect of growth in that income over the medium to long term; this is vital in protecting the real buying power of income over time. All of these asset classes will therefore continue to remain core components of the portfolios that we construct and manage for our clients. As we have seen many times before, including during difficult periods such as the credit crisis and Covid pandemic, it is important to not make knee-jerk decisions in such disorderly market conditions but instead focus on the underlying long-term strategy.
John Naylor, Chartered FCSI – Head of Investment Committee