Equity crisis headache for new UK PM

UK businesses face rising costs as customers head into a cost of living crisis, as likely next Prime Minister Liz Truss plans inflationary tax cuts

UK equities have had a difficult year. With the recession looming and the pound plummeting, it’s hard to see how the problems could subside before a new UK prime minister is sworn in.

Britain’s mid-cap index – made up of companies heavily dependent on the local economy – is down 20% this year, on track for a record annual underperformance against the export-heavy FTSE 100.

The steep losses show investor pessimism has taken hold of the economy, with the Bank of England saying a recession could stretch into 2024.

Photo: Reuters

“The FTSE 250 clearly has its challenges,” said AJ Bell chief investment officer Russ Mold. “The UK economy is facing the difficult combination of high inflation, slowing growth, rising interest rates, low consumer confidence and large piles of debt in the national and consumer level.

UK consumer price inflation topped double digits for the first time in 40 years in July, with Goldman Sachs Group Inc subsequently saying it could top 22% next year if oil prices natural gas remain high.

Against this backdrop, the national index has suffered its worst losing streak since the pandemic-induced rout in March 2020, as investors turn more negative on UK equities.

A net 15% of global fund managers are underweight the country’s stocks, up significantly from 4% in July, according to a Bank of America Corp survey last month.

The weakness of the British currency is supported by the crumbling currency of the United Kingdom, the pound trading near its lowest level since 1985. Although it is a boon for the export-heavy FTSE 100 – a surprising favorite of investors this year because of its exposure to energy and banks – it means local businesses are facing rising costs just as customers face a cost-of-living crisis.

It all adds up to a bleak economic picture for a new UK Prime Minister. Britain’s Foreign, Commonwealth and Development Secretary Liz Truss is leading the race, and many investors have criticized her proposed tax cuts as inflationary.

The cuts “will help struggling consumers in some ways, but also risk fueling inflation in a way that threatens to force the Bank of England’s hand on rate hikes,” said Chris Beauchamp, Chief Market Analyst at IG Group PLC.

“Truss faces the mother of all political headaches,” he added.

Among equity sectors, investors are particularly wary of UK homebuilders, utilities and retailers.

Companies like Persimmon PLC and Barratt Developments PLC have seen their market values ​​halved this year as the Bank of England launched a program of rate hikes to fight inflation, while the FTSE 350 Retailers Index has fell by around 35%, reflecting the contraction of the British. disposable income.

“Mortgage rates have jumped this summer and are expected to lead to falling housing demand and lower prices from this fall,” HSBC Holdings PLC analyst John Fraser-Andrews wrote in a note on Friday. that he was demoting seven house builders.

Utilities could also struggle, “particularly electricity and gas providers, as they appear at the heart of the cost of living crisis,” said Tineke Frikkee, head of equity research at Waverton. Investment Management Ltd.

Retailers, meanwhile, are hoping the new prime minister will announce support for households, freeing up cash for non-discretionary spending.

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