Market Update – September 2022

Whilst the UK has seen big changes over the last month with a new King and a new Prime Minister being appointed, neither bond nor equity markets saw any such change in September, both experiencing a very difficult period.

The market was also largely unprepared for the uncertainty caused by the UK Chancellor’s ‘mini budget’. £45bn worth of unfunded permanent tax cuts drew attention to the UK’s twin fiscal and current account deficits.

Gilts and Sterling became the victims as investors expressed their disapproval. This would have been a big enough shock in its own right, but it set other dominoes falling in a sequence that ended with the Bank of England having to intervene to maintain financial stability in the country’s pensions industry and the government itself.

Through the Banks programme of buying long-dated Gilts, a huge relief rally was triggered and, so far, the band aid is holding, meaning that the Bank has not had to utilise its full available firepower thus far.  It has also introduced further measures to guarantee liquidity to the banking system and to pension schemes in distress, if required.

This was a very meaningful warning to the Truss administration that the UK’s fiscal house must be kept in order, or at least that there must be a credible plan. Mr Kwarteng beat a hasty retreat by reversing the plan to scrap the 45p tax rate. Following the backlash that this mini-budget has received, today it has been announced that Kwarteng has now been sacked as finance minister, making him the shortest-serving chancellor since 1970.

Markets will typically anticipate perceived changes in economic fortune before the data of these changes become evident to the public.  So, now may not be the time in which to run from investment opportunities, but perhaps more so a time in which to consider strengthening our equity and/or credit weightings for when the tide turns.

We can now more safely judge that we are much closer to peak interest rate expectations, which helps to put a more positive slant on things during this turbulent period.  This will help to alleviate some of the pressure on bond yields and equity valuations.

As we know, markets and economies are cyclical by nature, so things shall eventually turn back in favour of investors at some point, but we just cannot be certain of calling where the bottom of the cycle is.  Therefore, as mentioned throughout previous market updates, any decisions being considered should be soundly based on a combination of both market intelligence, and, with an eye on our longer-term investment horizons.

If you have any questions arising from the above, please do not hesitate to get in touch with an Integrity365 Independent Financial Adviser today on 0117 450 1300.