Market confidence returns after chaotic few weeks
The financial markets may be complex in many ways, but in other ways they are very simple.
After a turbulent few weeks, the appointment of a new Chancellor in Jeremy Hunt and the subsequent instalment of a new Prime Minister in Rishi Sunak has given the markets the one thing they crave more than anything else – competence.
If the rest of the world is going to buy the UK’s debt, do they have the confidence that they are going to get their money back? Like any lender, the greater the uncertainty, the higher price they are going to want for the debt they are carrying.
Clearly, there is still a long way to go to restore full economic confidence and trust, but as many commentators have said in recent days, at least it feels like the “grown-ups” are back in charge.
One of my own clients viewed the events of the last six weeks as a “bad episode of The Apprentice”.
The announcement that the Autumn Statement has been moved back to November 17 from the rather less auspicious Halloween also makes total sense.
The bond markets have started to stabilise and the short-term volatility that we witnessed has been corrected. Bond prices rose sharply as soon as it looked likely that Mr Sunak was on course to become PM.
Three weeks of further stability and calmer market conditions should mean the Government will not have to pay as much interest on money it borrows because it is not considered as much of a risk.
Official projections suggest that the government’s bill for the interest on its debt could be up to £10bn lower than feared just a few weeks ago.
This could potentially change how much it needs to cut spending and raise taxes by to balance the books.
Our attention will turn next to the Autumn Statement on November 17, now upgraded from a Fiscal Statement, with the likelihood of wider tax and spending decisions being unveiled.
While I don’t anticipate changes to income tax, it is possible that pension tax relief could be in the Chancellor’s cross hairs.
We will, of course, review the Chancellor’s Autumn Statement in our next newsletter and any implications for clients.
Despite everything that we have seen in recent weeks, it is important to remember that investing in the financial markets is turbulent with longer term growth requiring a level of risk.
In the last five years – and despite a financial crisis, pandemic, energy emergency and war in Ukraine – portfolios have, on average, made between 20-25% during this period.
This, hopefully, reinforces the importance of the long-term and diversified planning that we undertake on behalf of our clients.