Client Update - 2nd December 2022

Chancellor Jeremy Hunt’s Budget appears to have gone down rather well with global markets as the cost of buying UK debt has steadily fallen since his announcement and the UK market has reciprocally risen in the past week or so. It is becoming evident that the UK is now in a mild recession, although data from the Office of Budget Responsibility (OBR) suggests a 2% overall reduction in GDP is expected, well below the 6% fall in GDP in 2008/09.

A fall in the yield on UK Gilts – the governments favored instruments to raise capital, remains key to the continued support of UK markets. Hopefully the UK can slowly rebuild its credibility in managing its own finances. To put this in context, the UK 10 year Gilt yield has fallen from 4.51% to 3.11%, meaning a reduction in the cost of servicing this debt of 31%. Good news for foreign holidays as well as the pound sterling has risen from 1.07 to the dollar to over 1.20. Adding in the expectation for falling inflation next year as we move past the large energy price rises in April 2022, then the outlook starts to look brighter.

Moving further afield, US equities had a welcome bump up this week as US Federal Reserve (FED) Chairman Jerome Powell sent a strong signal that the FED will slow the rate of interest rate rises, although he did also add that there was still some way to go in their fight against inflation. Mr Powell stated that a moderation in the pace of rate rises could come as soon as the next meeting in two weeks time, as he stated “my colleagues and I do not wish to overtighten”.

Ultimately, we have our fingers crossed that the UK Government can mature quickly and, at the end of the day, stop doing things that defy logic. The aforementioned OBR are suggesting that Brexit was possibly not the great idea it was hoped it would be, stating “the latest evidence suggests that Brexit has had a significant adverse impact on UK trade, reducing both trading partners and trading volumes”. The OBR went on the state that “Brexit will result in the UK’s trade intensity being 15% lower in the long run than if the UK had remained in the EU”. Brexit was sold on the basis of a brave new world and we can compare a similar sentiment to the ultimate damage done by Kwasi Kwarteng’s mini-budget and we can understand the current clamor for a period of calm reflection and common sense. This week it was incredulous to read that UK Treasury officials did not know what was in the September mini-budget and were therefore unable to brief the Bank of England on the overall scale of fiscal loosening it contained.

We expect inflationary pressures to continue to recede – natural gas prices have fallen some 40% since their peak in September. Central banks are purposefully creating a recessionary environment to cool demand and tame inflation, so once this process results in consistently month on month lower levels of inflation, the central banks can then quickly reverse their rate rises to support the economy. Our job is to invest sensibly and without taking undue risks until this moment arrives, and I am feeling more and more confident that this moment is not too far away. Please do have a good weekend.