WeeklyWatch – Sunak election causes markets to bounce

1 November 2022

Stock Take

The calm before the Autumn Statement

How did Sunak summarise Truss’ 45-day stint as Prime Minister after he succeeded her last week? “Mistakes were made.”

Though her aims were noble, Sunak acknowledged that he had been elected in part to fix these mistakes, and looking forward, he vowed that this government’s agenda holds economic stability and confidence at its heart.

More information about what this means from a policy point of view will be revealed when Chancellor Jeremy Hunt gives his Autumn Statement on 17 November. This will be the third Budget-type event in less than two months.

Sunak stated that there are “difficult decisions to come” when discussing how his plans will likely not follow Kwarteng’s previous tax-cutting, extra-borrowing blueprint.

His message has likely been chosen with one eye carefully focused on calming markets. Since government policy has done several U-turns recently, UK bonds, currency, and equities have been left in a volatile state in the past few weeks.

Upward trajectory for sterling

Sunak will be working hard both on our screens and behind the scenes to reassure markets that his government can be trusted, while they aim to reduce public borrowing without causing economic chaos.

Ruth Gregory, Senior UK Economist at Capital Economics, sums up the expectation for 17 November:

“The reports that the Chancellor, Jeremy Hunt, will unveil in his Autumn Statement on 17th November a fiscal tightening of up to £50bn by 2026/27 (1.7% of GDP) suggest that after a period in which fiscal policy has provided the economy with support, it is about to become a major drag.”

Gregory noted that when these numbers are looked at in context, the £50 billion makes up over a third of the annual budget of the Department of Health and Social Care. And in GDP terms, that means we’re at risk of seeing cuts almost as large as those unveiled by George Osbourne in 2010, with a 2.0% GDP fiscal tightening.

Initial public response shows a level of confidence in the new government following Sunak’s election. The value of sterling has been on a positive upward course, finishing at around $1.16 last week (compared to a low of $1.04 a few weeks ago).

It’s worth noting that a stronger pound might see weaker returns for UK investors with US assets, as US shares will be worth less relative to UK currency.

International interest rate hikes

Last week’s sterling strength caused some to question what lies ahead, given most earnings generated by its constituents come from overseas, though we still saw the FTSE 100 rise by +1.1%.

However, it also helped several UK companies with domestic customer bases, and we therefore saw the FTSE 250 surge 4.1%.

On Thursday, the Bank of England (BoE) will decide what to do with interest rates at the Monetary Policy Committee meeting. Inflation remains at over 10%, despite some of the more inflationary policies of the Truss government no longer existing. Markets are generally expecting interest rates to climb by 0.75-1% at the meeting, meaning they will likely have hit 3% or above at the end of the month.

The UK is not alone in this, as other territories are experiencing similar events. The European Central Bank pushed up interest rates another 0.75% last week, practically doubling them to 1.5%.

Across the pond, the US Federal Reserve is also due to meet in the coming week. The Fed is also expected to increase interest rates by 0.75%, but the US bank will have some wiggle room following recent figures released by the Bureau of Economic Analysis, which showed that the US economy grew by 2.6% last quarter.

With positive economic news in the US came positive moves for US stocks. The S&P 500 jumped by +4.0%, with NASDAQ Composite adding +2.2%.

Trouble for the tech sector

The two strongest performing sectors in the US during the week were energy and industrials, but this growth wasn’t seen across the board.

The tech sector has struggled for much of the year, resulting in several tech companies posting disappointing results – including huge names, such as Amazon and Microsoft. Meta, the parent company of Facebook, struggled in particular this year, and is down approximately 70% year-to-date.

These companies haven’t quite reached the end of the tunnel just yet, according to David Bowers, owner of Absolute Strategy Research:

“The announcements from Meta and Amazon were genuinely shocking (looking at the ensuing share-price action). The weakness of digital advertising revenues was a key factor – a source of cyclicality that is only going to get worse as next year’s recession takes hold and companies around the world scale back their advertising spend in response to a 20% contraction in profits.”

Many of the tech companies that performed remarkably well during the pandemic in 2020 and 2021 are now struggling. This serves as a reminder of how quickly public perception and share prices can change. This reinforces how it’s as important as ever to think long-term when reviewing investments and make sure you remain well diversified.

Wealth Check

Money will play an important part in each of our lives on a day-to-day basis, so it’s vital to understand how to manage our personal finances. You can achieve your goals or fall short of them, and that often depends on your financial literacy.

Today, 5.3 million children do not receive proper financial education in the UK, which means that less than half (43%) of young people aged 12 to 17 feel confident that they know what they’re doing when it comes to money.¹

Financial education wasn’t even part of the school curriculum just 10 years ago, despite information shared by the Money and Pensions Service showing that our money habits begin to form when we’re only 7 years old. Starting financial education in the earliest school years can help young people understanding money and how to use it wisely.

Kate Stickley, SJP Responsible Business Corporate Consultant, says:

“For me, building brighter financial futures starts with getting people to feel confident in talking about their finances, knowing where to find the information and who to talk to or turn to. It’s giving resources to future generations.”

Source

¹ Money and Pensions Service, 2020

The research was conducted by Opinium for the Money and Pensions Service. A nationally representative survey of 5,225 UK adults aged 18+ was conducted from 9^th – 19^th October 2020. There are over 52,673,433 million people over 18 in the UK (ONS), of which 55% don’t feel comfortable talking about money when they have worries about their financial situation.

The Last Word

“The reason I acquired Twitter is because it is important to the future of civilization to have a common digital town square, where a wide range of beliefs can be debated in a healthy manner.”

– Elon Musk explains his recently completed acquisition of Twitter.

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