WeeklyWatch – PM resignation does little to rock UK market

12 July 2022

Stock Take

Scandals and resignations

As political change took hold, the FTSE 100 market fell marginally last week.

UK Prime Minister Boris Johnson has come up against questions surrounding the way he handled former Deputy Chief Whip Chris Pincher, who has encountered a series of accusations regarding his sexual misconduct. The week began with UK Chancellor Rishi Sunak handing in his resignation from his position as Chancellor, with Health Secretary Sajid Javid following suit.

Despite the fact that the FTSE 100 had had a difficult start to the week, it did, in fact, remain largely flat, given Johnson’s news. The more domestically focused FTSE 250 saw a rise of 0.3% following the announcement.

Ben Lambert, Portfolio Manager at Ninety One, gives his opinion on the meaning of Johnson’s resignation:

“Our base case view is that Johnson’s resignation will have greater party political rather than economic policy implications in the near term. This is because his successor’s legitimacy remains nominally tied to the policy platform that received an electoral mandate in 2019.

“This view is, of course, contingent on his eventual successor not calling a snap election, which we don’t anticipate in our base case but acknowledge is a non-zero probability event. The limited immediate reaction in equity markets would seem to confirm this view.”

Bookmakers are betting on Sunak being the favourite to succeed and continue the economic policies of Mr Johnson. Other rival candidates have insinuated that they would consider further fiscal spending or tax cuts, or, indeed, a return to austerity.

Azad Zangana, Senior European Economist and Strategist at Schroders, observed:

“The outlook hinges on who Johnson’s replacement will be. A return to traditional Conservative politics will probably bring about some austerity over the next few years, but also a return to business-friendly policies. However, another populist politician could lead to more of the same approach for the economy.”

With inflation persistently rising, the UK dealing with a cost-of-living crisis, and many Brexit-related questions continuing to pose challenges (for instance, the Northern Ireland Protocol), Johnson’s eventual successor will have a host of immediate issues to tackle, and their policies could affect the outlook for UK companies over the latter half of 2022.

Light on the US horizon?

Following a tough first half of the year for US markets, the S&P 500 and NASDAQ Composite experienced a more positive start to the second half of the year, rising 1.94% and 4.56% last week, respectively. Adrian Frost from Artemis highlighted that since 1957, in the years the S&P 500 had a negative first half, it’s also fallen in the second half around 50% of the time.

He continued:

“Although it’s been better this week, sentiment on the whole remains understandably fragile: machines seem to be chasing different parts of the market up or down, depending on the latest macro data, such as the latest on US employment.”

This employment data revealed that payrolls rose by 372,000 in the US in June – way above the consensus expectation of 265,000. The relatively healthy job market would indicate that the Federal Reserve will probably continue to increase interest rates when the issue is next discussed at the end of July – most are anticipating another rate rise of 0.75% or 0.50%.

Felipe Villarroel, Partner at TwentyFour Asset Management, proposed that some of the drivers of the high inflation may be coming down, even though the market may not yet be bottoming out.

Oil and gas have been major drivers of inflation so far this year. On the other hand, he commented that, over the past month:

“Most commodities have seen price declines that are quite substantial, with oil falling close to 10% in a day this week and down 17% in the last month. One-month performance in other products has followed suit, with aluminium down 12.25%, copper and nickel down around 20% and notably wheat down 27.5%.”

Proceed with caution

Nevertheless, it’s vital to remember that the situation continues to be volatile. This week, for example, Russia is temporarily shutting down its gas pipeline, Nord Stream 1, for repairs – this will most likely further inflate prices, and could have a knock-on effect on European markets.

The Fed’s efforts may be starting to pay off if these are falling due to slowing demand. Only once they’ve reduced inflation will they start to loosen their grip on their monetary policy.

Keeping things in perspective is key – however, there are still many future headwinds that will undoubtedly keep the investment environment difficult. The Russia–Ukraine war is showing no signs of abating, and there remains a definite risk of recession, for instance. As far as investors are concerned, we’re not out of the woods yet.

Wealth Check

In 2022, inflation has reached lofty heights that haven’t been seen in decades. The result? For many, a ‘cost-of-living crisis’, with basic household goods becoming increasingly expensive.

Governments and central banks haven’t taken this lightly, having tried to limit inflation as best they can. One of the levers of central banks is to increase interest rates – higher interest makes it more expensive to borrow, which generally then reduces spending and therefore inflation. Yet this does, of course, create its own challenges. Additional costs are unwelcome with a population already struggling with the cost of living. Many economies are still fragile, and therefore there is also a risk that, if banks were to increase interest rates too much, a recession could take place.

This has brought about a difficult situation for investors. We know that we’re facing high levels of inflation and increasing interest rates, and yet there are still questions we can’t know the answer to, such as: Is this inflation transient? How much of the inflation is being caused by the war in Ukraine, and how much of it is the aftermath of COVID-19? Different asset classes will respond in different ways, depending on the answers. For instance, you may have seen the word ‘stagflation’ mentioned recently.

Stagflation is where we have high inflation coupled with a recession. There are very few places to hide in that scenario, but commodities usually perform best. Unfortunately, this asset class often finds other scenarios problematic – for example, if this inflation turns out to be transient and central banks become too aggressive. The result could be that inflation is driven down too far – just as the economy falls into a recession. Instead, being invested more heavily in bonds would be ideal. And what if central banks were to get it ‘just right’, where interest rates help bring down inflation, and we return to growth? In this case, it would be better to invest in equities.

Having a well-diversified portfolio is key here – containing considered asset allocations according to your risk profile. Instead of being too exposed to any one asset class, the risk of volatility will be reduced, and you’ll be in a good position to benefit from any future bounce-back – whatever form it may take.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society, as the value and income may fall as well as rise.

The Last Word

“I am lost for words for what this trophy means. It has always been and always will be the most special tournament. Realising a childhood dream in winning this trophy. Every year it gets more meaningful, I am really blessed. The most special court in the world.”

Novak Djokovic on what Wimbledon still means to him, after winning the latest tournament.

The information contained is correct as at the date of the article.

Artemis, Ninety One, Schroders and TwentyFour AM are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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