The UK (and many other parts of Europe) reached record-breaking temperatures this month, with an unprecedented series of wildfires occurring in the UK. The economy is also continuing to overheat, as inflation shows little sign of slowing down.
The UK political system is not faring much better following the long-anticipated resignation of the Prime Minister.
How UK Politics Affects the Economy
In the midst of soaring inflation and political conflict, the latest development is Boris Johnson’s resignation. This has been expected for some time. Regardless of their personal views on the Prime Minister and the current government, it’s understandable that investors are concerned about the economic impact of this announcement.
In reality, the effects will probably be minimal. Firstly, the market fluctuates based on what investors think will happen. As this news has been anticipated for some time, it was already priced in. The market tends to rise when it is already expecting a worst case scenario.
Secondly, on a global scale, UK politics really isn’t that significant. The UK makes up less than 5% of the world’s economy, so if you have a globally diverse portfolio, you have little to worry about. Additionally, the companies making up the majority of the UK market trade internationally, so are unlikely to be significantly affected.
The UK market has actually seen a positive return this month. However, another factor to consider is the devaluation of Sterling. The pound has weakened compared to other currencies, which makes it cheaper for overseas buyers to import UK goods. It can also mean that if you hold foreign investments, they may have increased in value due to the currency fluctuation. These factors can appear positive in the short-term, but a weak currency can make imports more expensive, and is not good for the economy over longer periods.
Are Energy Prices Going to Get Worse?
Gas prices have increased further this month, as Russia has cut supplies to Europe.
Additionally, the UK price cap, which has already increased significantly, is now expected to reach £3,244 when it is reviewed again in October. This is likely to push many families into an unmanageable situation.
Most households are already due to receive a grant of at least £400 to help with bills. The government is under increasing pressure to provide a higher level of support.
However, another consideration is inflation. Household support might make bills more affordable, but it does nothing to curb prices or address rising inflation. Injecting more money into the economy might make things even worse.
Inflation or Recession – Dealing with One Crisis at a Time
Balancing the economy is challenging. If growth is too high, inflation can spiral out of control. Too low, and we are at risk of recession. When we are faced with the aftermath of a pandemic, extreme weather, worker shortages, and an energy crisis, we have a perfect storm for both.
Central banks appear firmly committed to tackling inflation. Increasing interest rates is the main tactic, with both the UK and US implementing multiple rate rises since last year. This is expected to reduce the amount of money flowing in the economy.
The flipside of this is that businesses might find it more difficult and expensive to borrow, which could stifle the growth needed to keep a recession at bay. It could also put more pressure on consumers as their housing costs increase.
Inflation also has an impact on the property market. It can make it more difficult to save, but the main effect is that rising interest rates increase the cost of taking out a mortgage.
Savills reports that the UK property market has started to slow down in June 2022. Prices are still rising, but at the lowest rate since September 2021. Indications suggest that buyer demand is slowing down. This is likely to slow further if we do tip into recession.
The Bank of England has relaxed affordability testing, which means that buyers now only need to demonstrate they could afford a mortgage interest rate increase of 1% (formerly 3%). While this might widen the availability of mortgages (and stimulate the property market), it is a hypothetical assessment that doesn’t deal with the actual impact of rate increases.
The UK Market
The UK market has rallied this month, with the UK All Companies sector rising by 3.7%. The FTSE 100 (comprising the largest companies) has seen more modest growth of 1.5% over the month, but is one of the few major world indices showing a positive return on a 12 month basis. It’s good news for UK investors, but caution is advised. Rising oil and gas prices and a weak pound have contributed to this growth – neither of these factors are positive or sustainable.
Strongest performers this month include Photo-me International (which supplies photo booths used for passport photos), Mitie Group, and 4imprint Group.
Made.com has reported the worst performance by some margin, followed by Sabre Insurance Group and AO World. The cost of living crisis appears to have contributed to these losses.
The Global Outlook
The US market has regained some ground this month, with an increase of 4.4% in the North American sector. This follows several months of volatility and equity sell-offs. The market has been pessimistic for some time, anticipating rising inflation and further interest rate increases. This slight upswing does not necessarily indicate that this is reversing, more that there is an inkling that the impact might not be as bad as we thought. We shouldn’t read too much into a short-term boost as these occur frequently during volatile periods.
European and Asian markets also showed modest signs of growth this month after significant volatility throughout the year.
Please don’t hesitate to contact a member of the team for more information on any of the topics covered.
The value of investments can fall as well as rise and is not guaranteed. Past performance is not a guide to future performance.
The content in this article was correct on 01/08/2022.
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