New PM, good news for investors?

It’s almost certain Liz Truss will win the Conservative Party leadership contest and become the UK’s next Prime Minister on Monday 5 September. She will face a very difficult start, given the state of the UK economy. The most obvious expression of this is consumer confidence, and the GfK Consumer Confidence Barometer is currently at -44, in other words, very low. One reason is the reduction in the purchasing power of UK disposable incomes. The reining-in of consumer spending is likely to worsen as the weather cools and the next massive change in energy prices falls due. Average bills are expected to top £3,600 a year when the new energy price cap is announced on Friday. 

Optimists can make a case that it’s not all bad. The unemployment rate is around 3.8% and jobs are plentiful – even if people may feel hard done by. However, while jobs are being created, the pace of job creation has slowed and the fact that consumers are reducing spending in volume terms is evident in declining real GDP terms as well as in the retail spending data. 

For the Bank of England’s Monetary Policy Committee (MPC), another rate rise of at least 0.5% in September seems as certain as Liz Truss’s victory. The market currently prices a rise in base rates to over 3.75% by March 2023. Moreover, the Bank of England will have its remit examined immediately by the new Truss regime, and this might be a source of worry for the currency market. It is unlikely the government would try to challenge the Bank’s independence directly, but currency traders may worry about greater political influence exerted on its decisions and analysis. 

At least we are not alone. The rest of Europe has similar concerns over inflation and energy. And while natural gas and electricity prices continue to rise, oil prices have fallen substantially over the past few weeks. Moreover, US growth remains strong, almost uncomfortably so. Investors are moving back to expecting more rate rises from the US Federal Reserve (Fed) but that is in response to solid signs of economic resilience, something which is welcome for a softer Europe and UK. Despite Europe and the UK’s issues, the profit outlook for our global companies has remained positive, especially in Sterling and Euro terms. As we have observed recently, globally-oriented portfolios can still hold up reasonably well even if the outlook domestically is more gloomy.

This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.

Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.