A week is a long time in politics…
17 OCT 2022
‘A week is a long time in politics’ (Harold Wilson), sums up the last week or so in the United Kingdom. This has made writing the quarterly valuation letter more challenging than usual.
Two weeks after the anointment of Liz Truss as the 56th Prime Minister of the United Kingdom, and the first of King Charles III’s reign, the ex-Chancellor of the Exchequer, Kwasi Kwarteng announced his ‘mini budget’ on 23rd September. This mini budget was characterised by tax cuts at the personal and corporate level and a generous energy funding scheme. This resulted in a repricing of UK Government risk, as these unfunded tax cuts led to the belief that the interest rates reflected in government debt (Gilts) will need to rise to ensure UK debt remains attractive to lenders. In other words, the issue of the increasing cost of government borrowing, which was already rising due to inflation, was further exacerbated. It is not our place to comment on the philosophy behind specific government policy; that is a personal matter. However, as market participants, we are affected by policy and are free to comment on its impact; and that now includes the resignation of Kwasi Kwarteng, forced by Liz Truss whose authority is further weakened on the day the Bank of England (‘BoE') ends its support of the Gilt markets (a market calming tool that may be needed again). Yet more volatility will ensue until it becomes clear that the UK is being steered by policy makers and decision takers who are acceptable to market participants.
