You’ll no doubt have heard about Liz Truss being appointed as our new Prime Minister, so you’re likely thinking about what this might mean for you. I’d like to offer a few thoughts from a financial and investment perspective.
Changes Expected with the New Prime Minister
The easiest starting point is to touch on two of her biggest priorities: taxes and energy costs.
- Taxes: Truss has openly advocated for lower taxes, which comes with some controversy. On one hand, it puts money back in the pockets of individuals, which is welcome, but this could also prove inflationary—at a time when inflation is already at multi-decade highs.
- Energy costs: She wants to cap the cost of energy as well as address energy supply issues, which is a warmly welcomed initiative. This could help reduce inflationary pressures and support the economy, but it will increase the country’s debt burden.
On top of these initiatives, Truss has hinted that she might look into the Bank of England’s remit. This was considered risky as the Bank of England works to combat inflation at the same time as we likely enter a recession, although she insists its independence will remain untouched.
Financial Impact
The U.K. has several structural issues to work through that require difficult policy choices. That said, the appointment of a new Prime Minister is not expected to significantly change the investment outlook. We saw this in prior leadership changes, including Boris Johnson, Theresa May and David Cameron—where volatility increased in the lead-up to their appointment, only to settle in the aftermath. The big difference today is that Liz Truss enters at a sensitive time, with households hurting and in need of support.
One important point here is that the U.K. economy is not the same as the U.K. stock market, as over 70% of the revenues of the U.K.’s largest listed companies are derived offshore. So, even if Truss’ policies fail to impact the U.K. economy, this may not translate into falling share prices for U.K. investors.
Many investors will be focused on the currency impact as part of the leadership change, however even these views need to be balanced. The pound has been falling, but this is as much about U.S. dollar strength as it is about sterling weakness. We need to keep in mind that a falling pound actually helps many of your international holdings too.
All this to say that we’ll be keeping a close eye on the political landscape, but we’ll also be looking beyond that. Making financial progress is about understanding your goals and risk tolerance, then making investment choices in a way that reflects the current environment. Diversification is our friend in this sense and something we take seriously.
Furthermore, we continue to have confidence in your overall positioning, with many areas that are considered undervalued. This gives upside potential, but it could also help stem any short-term losses if volatility continues.
Last, we reiterate that moments of weakness (if and when they occur) can prove great entry points to sow the seeds for future returns. Conversely, holding too much in cash can limit your ability to reach your goals, where we’ll leave the final word to Warren Buffett, “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” – Warren Buffett, 20081
We hope you find this perspective helpful and we’ll keep you updated as things change. As it stands, we want you to know we’re carefully monitoring proceedings and we are here to help with any questions you may have.
Important Information
Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested.
The information contained within this newsletter is for guidance only and does not constitute advice which should be sought before taking any action or inaction.
1https://www.nytimes.com/2008/10/17/opinion/17buffett.html
John Sangster
Director – Chartered Wealth Manager & Head of Investments
