Please see below, an article from Brewin Dolphin on Rishi Sunak being confirmed as the UK’s new Prime Minister and the potential impact on the markets. Received late yesterday afternoon – 24/10/2022.
Rishi Sunak has been named the UK’s next Prime Minister.
Paul Danis, Head of Asset Allocation at Brewin Dolphin, discusses whether the announcement could herald a more stable environment for financial markets.
After one of the most turbulent periods in the UK’s political history, Rishi Sunak now faces the difficult task of rebuilding the country’s economic and fiscal credibility.
Sunak takes the helm at a time when inflation is at a 40-year high, borrowing costs are rising, and a recession seems increasingly imminent. That backdrop existed even before the economic and market turmoil created by September’s mini-budget.
Despite not winning the Conservative Party leadership race over the summer, Sunak quickly became the heavy favourite this time around after Boris Johnson announced over the weekend that he was pulling out of the race. Just before today’s nominations deadline, rival Penny Mordaunt also dropped out of the contest, thereby securing Sunak’s position as leader of the Conservatives.
Sunak’s leadership race over the summer emphasised curbing inflation, which was in stark contrast to Liz Truss’s pledges for unfunded tax cuts. Last month’s announcement that those pledges would go ahead saw UK government bonds and the pound tumble, the sacking of former chancellor Kwasi Kwarteng, a reversal of nearly all Truss’s proposed tax cuts and, ultimately, the resignation of Truss herself last week.
How are markets reacting?
So far, the news has been welcomed by financial markets, as Sunak is perceived to be fiscally conservative and market savvy. The makeup of the cabinet will be important to instilling much needed stability.
The pound has been gaining on the dollar and the yield on UK government bonds (gilts) has fallen back to pre-mini-budget levels. Both are welcome developments. A rise in the pound means it costs less for companies in the UK to buy things from abroad, and lower yields make government borrowing cheaper.
Are calmer times ahead?
The past month has been a tumultuous one for investors, who will no doubt be hoping for calmer times ahead. From a political point of view, we would expect much less turbulence going forward, which should help to restore confidence.
Yet we can’t escape the fact that the wider problems facing the UK haven’t gone away. Today’s purchasing managers’ indices suggest the UK is already in a recession, with business activity falling for a third consecutive month. The country is still suffering from a worsening budget and current account (twin) deficit.
Gilt yields have declined over the past 12 days, but they still stand substantially above the levels we saw last December. Higher borrowing costs place a further burden on government, household and business finances. And although the pound has stabilised after the recent policy U-turns, it should remain under downward pressure versus the dollar over the medium-term as global economic growth momentum slows.
Ultimately, Sunak is inheriting an economy which is in or heading into a recession, with little room for policy support. It will be an extremely difficult balancing act. The next big focus will be on the medium-term fiscal plan, which is due to be announced on 31 October; every figure will be subject to heavy scrutiny.
The outlook is no doubt challenging, but the silver lining is that fiscal and monetary policy are now aligned to fight inflation. As inflationary pressures moderate and UK credibility is regained, the worst of sterling and gilt volatility should be past us. In addition, with UK bond yields easing off the highs of earlier this month, mortgage rates will likely come back down as well, which will provide some relief to homeowners.
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Cyran Dorman
25th October