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VOLATILITY AND OPPORTUNITY
ALASTAIR POWER | INVESTMENT RESEARCH MANAGER
Labelling the past few weeks as ‘volatile’, in both the political and financial sense, could be considered a dramatic understatement.
Former Chancellor Kwasi Kwarteng’s controversial mini-budget sent shockwaves through financial markets, causing significant moves in government bond prices and a leg downwards for Sterling in the currency markets. The Bank of England intervened with a short-term bond buying programme aimed at stabilising the government bond market, and the International Monetary Fund unexpectedly weighed in with concerns of its own. In the aftermath, leading economic research institute the Institute for Fiscal Studies noted that the Truss-Kwarteng partnership hit on the right problem of low growth, but their solutions failed to add up. So badly were the new economic policies received, the Conservatives were forced into a dramatic reversal of some policies which ultimately ended in Kwarteng’s demise just thirty-eight days into the job, making him the secondshortest-serving Chancellor in the postwar period. Jeremy Hunt’s appointment as Chancellor makes him the fourth to hold the post in 2022, with his first act a quick dismantling and reversal of nearly all the proposed policies of his predecessor.
Amidst the volatility, political party conferences provided insight into potential future policies. Labour’s economic growth plan appeared to be well received, with the prospect of an £8bn National Wealth Fund in the pipeline as part of an ambitious outlook to turn Britain into a green growth superpower. Meanwhile, Liz Truss and her then Chancellor doubled down on their “growth, growth and growth” outlook, but ultimately failed to quell the fears of party members and financial market participants. Unable to recover from her precarious political position, financial markets reacted positively to Liz Truss’ resignation with yields declining and Sterling stabilising. Rishi Sunak’s subsequent appointment has been well received by many, yet significant hurdles remain in the run-up to the next general election.
In periods of heightened market volatility, opportunities begin to present themselves. For the first time in nearly eight years, the inflation-adjusted yield on an index-linked government bond is positive, the compensation for investors buying corporate bonds over government bonds trades at attractive levels, and the market dynamics driving growth trends in certain subsectors have strengthened. The rise of “Generation Rent” is one such trend explored, with higher mortgage costs and reduced discretionary spend at the hands of inflation looking set to keep the younger generation in a supply constrained rental market.
As we approach the latter stages of 2022, financial markets looked to have entered a period of calm. While difficulties continue and the outlook for many remains nervous, enough opportunities are becoming apparent to improve a riskto-reward profile within portfolios.
