The UK government’s ‘mini-budget’ on Friday was anything but ‘mini’. It was Britain’s biggest set of tax cuts in decades.
And while on the surface many of our new Chancellor’s moves might seem positive, investors are voting with their feet for now. UK markets fell sharply and sterling reached an all-time low against the dollar – two developments showing a distinct lack of confidence in the UK.
Such turbulent times can be troubling for investors. And these are undeniably turbulent times. But that doesn’t mean there aren’t signs of better conditions ahead for long-term investors. In fact, times of uncertainty could lead to locking-in attractive bond yields and good deals on stocks.
Lilian Chovin, Head of Asset Allocation at Coutts, says, “We believe it’s best to stay focused on the future when investing – we recommend looking ahead five years or more. How do markets look over the longer term? How does that match with what you want from your money over time?”
Do remember that the value of investments can fall as well as rise and you may not get back what you put in.
Will inflation get out of hand?
The government’s announcements are all designed to spark economic growth. But analysts are asking how the government will pay for it all. And although putting more money into people’s pockets may feel like a good thing, particularly during a cost-of-living crisis, it arguably ignores the economic elephant in the room – inflation.
Prices are rising at a record rate, so encouraging us all to spend more could see inflation spiral out of control.
As a result, the Bank of England may be forced to raise interest rates higher and faster – there’s already talk of an emergency meeting so they can hike it sooner than usual. Then we’re looking at higher borrowing costs for people and businesses, and that has the power to slow growth.
So we’re potentially looking at a situation where the government tries to stimulate growth while our central bank tries to settle it down.
This all weighs heavily on the UK’s currency too. While tax cuts and deregulation could be interpreted as good for sterling, it’s not straightforward. A splurge of tax cuts at times of elevated inflation pressures and a stagnant economy are not supportive for the pound and could raise the currency’s volatility further.
The result? Uncertainty. And investors hate uncertainty.
Lilian says, “Irrespective of whether one thinks these are good measures or not, delivering a huge fiscal boost at a time when inflation is running near double digits is a big risk.
“It’s not only a departure from what the previous government was doing, it’s somewhat at odds with other countries where they’re taking great care not to make the inflation problem worse. If it pays off, we could see strong growth. But it could make matters worse.”
Do remember that the value of investments can fall as well as rise and you may not get back the full amount you invest.An economy experiences ‘stagflation’ when growth is stagnant and inflation is high. It’s an unwanted situation because money is losing value while investments into assets such as shares in companies aren’t making returns because there is such low, or even negative, economic growth.
Stagflation became financially synonymous with the difficulties the UK and other economies faced in the 1970s. The oil producing organisation OPEC embargoed oil exports to many western nations, pushing up oil and energy prices dramatically. The rise in the cost of living, fuelled in part by wage price spirals, coincided with stagnant economic growth, and unemployment was high while things got more expensive. This resulted in stagflation.
Although we currently have an energy shock, especially in Europe, as a result of the Russian invasion of Ukraine, the main driver of today’s inflation pressures was the pandemic. It led to a large demand for goods when strained and locked-down supply chains couldn’t cope.