2 minute read
HARD TIMES
JAMES S. ANDREWS | PARTNER & DIRECTOR OF INVESTMENT MANAGEMENT
The UK finds itself in a precarious position. Leaderless (at the time of writing), with inflation (CPIH) running away at 9.4% to the 12 months to June 2022, seeing interest rates rise and facing up to slowing growth.
Inflation is the key concern, mainly as it is being caused by supply-side issues, so it is the worst kind of inflation, namely ‘cost-push inflation’. The key contributors being rising energy prices, grocery prices and disruption from supply chains due to both the COVID pandemic and the ongoing effects of Brexit.
The top 100 stocks listed in the UK had until recently performed well on the back of a large exposure to Oil & Gas companies as well as other commodities via mining companies. However, we are now seeing a pull back here too as the increasing possibility of a recession is factored in.
Interest rates are now 1.25% which is up from just 0.1% back in December as the Bank of England (BoE), along with other central banks around the world, look to curb inflation. In fact they could go as high as 2% over the next 12 months as the BoE attempts to bring inflation back to the target of 2%.
For the consumer the bad news looks set to continue as, in addition to rising borrowing costs thanks to the increase in interest rates, the energy price cap is set to rise again in October; that price rise looks to be as high as 65% which does not bode well for UK retailers.
A tough economic period for the UK looks set and so it will be incumbent on the new Prime Minister to look to act and offset some of this pain. A UK election within two years should help focus minds on improving the situation, and on the positive side the markets will start to look past the near-term pain quickly if they see inflation coming under control.
It is fair to say that the next six months are likely to be turbulent whichever way you look.
