An update for clients

28 SEP 2022

In less than a month, the UK has witnessed the appointment of a new Prime Minister, lost a much loved and respected sovereign, implemented an energy price cap and, most recently, seen a ‘mini-budget’, causing Sterling’s collapse against the US Dollar. Interest rate expectations are rising at a pace not seen in decades. It is therefore appropriate to update you on our market view and our consequent investment activity.

Most recently, we have been adding to “specialist fixed interest” (higher yielding credit assets) as the level of yield is more than compensating for the credit risk. This was identified before the latest round of news and the dynamics still stand.

The energy price cap would have been implemented earlier if the Conservative Party had not been holding a leadership election for most of the summer. The policy is welcome to many, but how it is afforded, or more bluntly put, paid for, will be a recurring question for this new government’s economic policy. Chancellor Kwasi Kwarteng’s economic policy has been unkindly described by some as ‘Kame-Kwasi Economics’. The UK bond and currency markets have reacted poorly to what appears to be unfunded government spending. Tax cuts may be welcome in the short term, but the government needs supportive debt markets, and the debt markets have fallen violently, as has the currency. Although it is easy to get lost in the noise, sterling is not the only substantive loser against the US Dollar - the Euro is also having a challenging time. Whether the Chancellor’s unorthodox approach works, only time will tell. The Bank of England may feel it needs to implement an emergency rate rise; it finds itself dammed if it does, damned if it does not. Mortgage providers are reassessing their markets, borrowing is and will continue to get more expensive. Interest rates will hit levels not seen in decades, but this is expected to be short-lived as inflation falls, and the economy cools further.