Margaret Thatcher “If you just set out to be liked, you would be prepared to compromise on anything at any time, and you would achieve nothing”

The psychodrama that is British politics culminated in the swift downfall of now ex-PM Liz Truss in October, after only 45 days in office. Thus, achieving the title of the shortest serving UK Prime Minister in British history and ousting the previous holder, George Canning, who lasted 119 days before dying in office of pneumonia in August 1827. Arguably, her term may have lasted longer if her government didn’t follow Thatcher’s advice, and instead sought some compromise in the formulation of its ill-fated ‘mini budget’, which was founded on conflicting economic beliefs.

The astonishing turmoil that ensued during this 6 week period weighed heavily on UK assets, with the British Pound collapsing to a record low against the US Dollar, at one point trading towards parity at 1.04 US Dollars to one British Pound. The FTSE 250 index of smaller sized more domestically-focussed companies relative to the FTSE 100 index, declined -15% from mid-September to mid-October, whilst 10-Year UK Government Bond Prices (Gilts) declined -10% over the same period. This led to intervention by the Bank of England in the Gilt market to contain and stabilise some of the shortest sharpest yield spikes in the market’s history. The recent appointment of Rishi Sunak as the UK’s third Prime Minister in as many months, has restored some confidence throughout the UK financial system on expectations of a more coherent approach to combatting the cost of living crisis and restoring the credibility lost as a result of the Truss administration.

This does not come without challenges, the British public are experiencing rising costpressures with the Consumer Price Index currently at 10.1%, the highest since 1982, and in response the Bank of England have raised interest rates from 0.1% to 3.0%, the highest level since 2008, putting further pressure on UK mortgage borrowers.

The challenges are mounting for both UK households and businesses with the Bank now warning the UK is facing its longest recession since records began and expects a “very challenging” two year slump with the risk that the unemployment rate could double by 2025. Alas, there is a silver lining, albeit not that bright, the Bank has also signalled that its interest rates should not rise as much as markets are pricing in, partly because of the likely event of a prolonged recession but also implicitly because it does not want to cause a housing market crash.

Additionally, in an effort to stabilise the public finances of UK Plc, the Chancellor of the Exchequer, Jeremy Hunt, is set to announce a major economic package on November 17th with the aim of identifying £50 billion in spending cuts and tax increases. Further windfall taxes on energy companies are among the potential measures, along with adjustments to personal & corporate tax rates that should restore some credibility to the UK, but sadly for the British people, also usher in another era of fiscal austerity.

Economic data continues to moderate, raising the probability of a recession over the next 12 months. Inflationary pressures are broad based, but many cyclical components are decelerating from their post pandemic highs. The Federal Reserve continue with their hawkish narrative and remain committed to prioritising lower overall levels of inflation. Despite expectation of smaller hikes at future meetings, Powell warns that the terminal rate is likely to end higher than is expected. The labour market is still running hot, but conditions are gradually easing, as labour supply rebounds and job openings slow from a record peak.

The ECB is also strengthening its resolve to combat the historically high inflation level of 10.7% with the Governing Council raising rates by 75bps in both October & September. Recession risks in Europe are primarily geopolitically driven, as high energy prices and elevated uncertainty are exerting a toll on the Eurozone economy.

The turmoil felt throughout the UK financial system as a result of the “Mini-Budget” is fading with the appointment of Rishi Sunak, however, the cost-of-living crisis continues to weigh on the UK consumer, with inflation hitting the highest rate since 1982 at 10.1%. The Bank of England continues to raise rates to the highest levels seen since 2008, however, Governor Andrew Bailey notes that the prolonged recession will likely mean that rate expectations will fall short of market expectations.

Japan’s economic recovery has lagged other major economies and its long-term trend growth rate is amongst the lowest in the G20. Yen weakness worries some policymakers with headline inflation hitting 8-year highs. The central bank is notably out of step with its counterparts in North America, Europe, and Australasia where significantly tighter monetary policies are in motion, mounting substantial downward interest rate differential pressure on the Yen.

The Chinese economy continues to be weighed down by its ailing property market, which is experiencing its worst period on record, all exacerbated by the government’s zero Covid policies. Monetary (interest rate cuts) and fiscal (wider deficits and VAT rebates) stimulus continues. Unlike in western economies this year, Chinese inflation pressures have remained benign, leaving the People’s Bank of China as the only major global central bank to cut interest rates and ease financial conditions in 2022. The 20th National Congress of the Chinese Communist Party led to President Xi Jinping securing an unprecedented third term as China’s top leader.

A big driver of economic and market performance in EM and overall economic conditions in general is the strengthening US Dollar, which has so far in 2022 strengthened the most in a calendar year since 1984 (DXY Index). Inflation surprises in EM have turned more two-sided in recent months. Broadly, EM financial tightening pressures, which started earlier than many advanced economies, may possibly have peaked.

The information set out in this document has been provided for information purposes only and should not be construed as any type of solicitation, offer, or recommendation to acquire or dispose of any investment, engage in any transaction or make use of the services of Signia. Information about prior performance, while a useful tool in evaluating Signia’s investment activities is not indicative of future results and there can be no assurance that Signia will generate results comparable to those previously achieved. Any targeted returns set out in this document are provided as an indicator as to how your investments will be managed by Signia and are not intended to be viewed as a representation of likely performance returns. There can be no assurance that targeted returns will be realised. An estimate of the potential return from an investment is not a guarantee as to the quality of the investment or a representation as to the adequacy of the methodology for estimating returns. The information and opinions enclosed are subject to change without notice and should not be construed as research. No responsibility is accepted to any person for the consequences of any person placing reliance on the content of this document for any purpose. No action has been taken to permit the distribution of this document in any jurisdiction where any such action is required. Such distribution may be restricted in certain jurisdictions and, accordingly, this document does not constitute, and may not be used for the purposes of, an offer or solicitation to any person in any jurisdiction were such offer or solicitation is unlawful. Signia Wealth is authorised and regulated by the Financial Conduct Authority.