UK ‘non-investable’ market lost £300bn in first month of Truss

A wild first month for Liz Truss’ government has seen at least £300bn ($340bn) wiped out of the combined value of the country’s stock and bond markets.

As assets globally were shaken by central bank efforts to rein in soaring inflation, confidence in the UK was shaken. September’s sell-off on concerns over the Truss government’s tax cuts saw the pound hit a record high against the dollar, Bank of England intervention and a humiliating government run amid credibility issues .

“The feedback we’re getting from investors is that they view the UK as uninvestable as long as there’s such government chaos,” Liberum Capital Ltd. strategist Joachim Klement said in written comments.

Recovering ground since late September, the FTSE 350 index – which includes stocks from the export-heavy FTSE 100 and the domestically-focused FTSE 250 – has fallen around £77bn since the September 2 close, the last trading day before the conservative ruling Party picked Truss as its leader, according to data compiled by Bloomberg.

The market value of Bloomberg’s inflation-linked gilt and gilt indices lost around £200 billion during this period. This reflects a global bond sell-off as well as UK-specific concerns. Last month saw the biggest ever rise in yield on UK 10-year government bonds. This saw them top 4% for the first time since 2010.

Sterling-denominated investment-grade bonds lost £26 billion over the same period, depressing the market value of a Bloomberg index that tracks stocks to their lowest since January 2014. A bond gauge £-denominated junk – of which UK businesses account for around 90% – saw its market value fall by £1.8 billion.

Truss sought to allay market concerns in a speech at his party’s conference in Birmingham on Wednesday. Nonetheless, the pound extended its declines after the speech as the dollar rallied.

Amid confusion over Chancellor of the Exchequer Kwasi Kwarteng’s plans to release public finance forecasts, the government could be pressured to fine-tune policy further if those estimates fail to reassure markets, partner Christy Wilson said. at Katten Muchin Rosenman UK LLP, a solicitor. firm that advises the financial sector.

Emerging value

Still, following the sell-off, value is starting to emerge in UK stocks, according to Liberum’s Klement. Even if earnings estimates are cut by a quarter, the FTSE 350 and FTSE 250 would be at or below five-year average price-earnings ratios, he said.

Some investors see opportunities to build positions. “There is a feeling that stocks are starting to look very cheap, attracting some opportunistic investors to the market,” said Victoria Scholar, chief investment officer at Interactive Investor, the retail arm of Abrn Plc, via email. mail.

As for the pound, it has recovered ground since the mini-budget rout, leaving it trading at around $1.12 after falling to $1.03. However, that should not be taken as a vote of confidence in the government, according to Seema Shah, chief global strategist at Principal Global Investors Ltd, who noted that the gains coincided with the income tax reversal.

“The rises in the pound could actually tell us that investors think the Truss/Kwarteng axis can be aligned,” she said by email.

© 2022 Bloomberg

Comments are closed.