7 October 2022

The Changing of the Guard

Have markets lost faith in Liz Truss and her new conservative government? Brian Tora provides his insight.

Well, no one can accuse markets of being in the doldrums of late. The last two weeks have encompassed a myriad of changes, including the pound hitting an all-time low and Gilts – or British Government Securities – requiring a bail out from the Bank of England to avoid a collapse in our pensions industry. I last encountered severe upsets on this scale nearly 50 years ago, but then I really am that old.

Focussing on the future, which is what I had hoped to do, is all well and good if you understand what the policy makers are likely to be up to. But the occupants of numbers 10 and 11 Downing Street have changed and possess a dramatically different view on how best to manage the economy compared with their predecessors. Indeed, Chancellor Kwarteng’s so-called mini budget really tore up any conceptions we might have had on how Conservative governments might behave.

Markets, understandably, were spooked by the approach taken and, while the reversal of the most controversial measure may have calmed things, there is much nervousness about. Fifty years ago, Conservative Chancellor Anthony Barber tried a similar growth strategy at a time of rising inflation – driven again by higher oil prices. It failed and was followed by two successive defeats for the Tory party at the polls. This lesson of political history must weigh on our new Prime Minister.

That said, our benchmark FTSE 100 Share Index initially shrugged off a disappointing start to the week (it was more than 1% down on Monday at one stage) to build a useful recovery which brought it back over 7000. The more domestically focussed 250 Index even got off to a stronger start as the week progressed. Both were helped by a strong performance on Wall Street, but the more conventional approach being taken by the government helped, given the turnaround in sterling’s fortunes. Unfortunately the confidence was short-lived, with our major indices in retreat by the middle of the week.

But a global recession remains a dark cloud on the horizon. Most commentators expect the US to dip into negative territory, given the hawkish attitude of the Federal Reserve Bank. The question is, how deep? And will it derail Liz Truss’s plans? Perhaps more important, will a Bank of England determined to defeat inflation through much higher interest rates drive us into recession anyway? The future, as always, is concealed from us.

Brian Tora                                                                          

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