What does Liz Truss mean for investment?

It is now official, Liz Truss has become the new prime minister and is set to lead the country until the next general election in January 2025.

With a volatile macroeconomic environment, the new prime minister will have a lot on her plate. That will include addressing the energy crisis, the hike in living costs and a turbulent geopolitical climate.

Truss pledged during her campaign to cut taxes. It seems markets are not convinced by this strategy as the pound is trading at its lowest level since March 2020.

Money Marketing asked different actors in the asset management industry what Liz Truss’s appointment means for investment and the UK economy.

Rathbones fund manager of multi-asset portfolios David Coombs:

“Liz Truss has indicated that she will cut taxes and increase spending to revitalise the UK economy. This would include reversing this year’s national insurance increase and cancelling the rise in corporation taxes. She has also spoken about a significant cut to VAT.

“Reversing prospective tax rises on the eve of recession is not overly controversial; however, reducing VAT is not targeted, could be inflationary and it’s harder to police as often price reductions are not passed on.

“The first question is how will she achieve this given the revenue drop?

“She’s suggested that the government could package up Covid-19 debt and sell it off, just as it did back in the Second World War with war loans. It’s difficult to predict whether this will work – she would first need to convince the bond markets to buy the loans.

“More important is the impact tax cuts will have on the wider economy.

“Cutting taxes could potentially and theoretically reduce the risk of recession. That would give the Bank of England a bit more flexibility in raising rates, which could mean sterling recovers.

“One issue with Ms Truss’s plans, as highlighted by numerous economists, is that it could be inflationary.

“The reality, of course, is that inflation is a global problem, caused partly by the war in Ukraine and its impact on commodities; partly by economies still recovering from the massive shock of Covid-19, and partly by China still having a large part of its economy shut due to the pandemic.

“There are a lot of forces outside of the control of politicians and central banks that are impacting inflation, yet we are using conventional measures to fight it.

“it’s too early to make drastic changes to portfolios. The issue will boil down to how overseas investors regard the new administration.

“With lower taxes consumer discretionary names may perform better, particularly those benefitting from ‘trading down’ and those that could benefit from governmental support for lower to middle earners. So everyday high street names could benefit in the short-term despite recession, versus mid-market operators.

“In my view, the best companies to invest in are those that are less reliant on the vagaries of government or central bank policies. Instead, they tend to dominate their markets due to better quality products, or services and offer their customers the best value for money. They are the true defensives.”

Allianz Global Investors head of fixed income macro unconstrained Mike Riddell:

“It is difficult to trust campaign policies and we look forward to gaining more clarity on actual policy in the Autumn budget.

“The independence of the Bank of England and government institutions is a source of confidence for UK investors – the UK is definitely not an emerging market yet. With this in mind we do not have any major concerns over the outcome of the leadership competition for the asset management industry and we believe there are more pressing macro headwinds facing UK and global investors in the short to mid-term.

“Longer term, political risk usually follows economic risk. Our base case scenario is we are heading into a nasty UK and global recession, and it seems very unlikely that political risks will go away any time soon.

“An unstable government and rapidly changing leaders leads to increased risk premia.”

Royal London Asset Management head of multi asset Trevor Greetham:

“Liz Truss has set expectations high by saying a recession is not inevitable. Targeted help for lower income households that will struggle to pay heating bills this winter is essential, but broad based fiscal stimulus is unlikely to prevent a contraction in the economy, in our view. This is because, with inflation expectations surging, the Bank of England is likely to respond by pushing interest rates higher than they otherwise would have done.

“According to OBR and Bank of England estimates, Brexit is part of the stagflation shock the UK is suffering, reducing long run GDP by about 4% while adding about 5% to the cost of living. In this context, following through on promises to override the Northern Ireland Protocol could worsen an already fragile outlook by triggering further sterling weakness and raising the spectre of a trade war with the EU.

“This remains a difficult environment for UK bond investors, who will need reassurance that talk of reviewing the Bank of England’s  inflation fighting mandate or avoiding Office for Budget Responsibility scrutiny was something for the leadership campaign rather than government.

“The picture is very different for equity investors. Despite the challenging macro outlook, the UK market has outperformed this year. It offers good value, its sectoral make up is resilient to rising interest rates and UK-listed companies derive the bulk of their earnings overseas, so continued sterling weakness would, if anything, be a positive.”

Tyndall VT Tyndall Real Income Fund manager Simon Murphy:

“It is hard to fully assess the likely policy changes, their magnitude and potential impact at this early stage as details, understandably, remain scarce.

“At face value there appears to be an ambition to revert to the traditional Tory playbook of small government and low taxes, albeit potentially hamstrung in the short term by the urgent need to offer as much help as possible in the face of the ongoing cost of living crisis.

“Other potentially thorny issues to be dealt with in due course include a possible review of the mandate of the Bank of England as well as addressing the outstanding Brexit related issues, most notably around the Northern Ireland protocol.

“Whilst the in-tray appears somewhat daunting, we do not believe it is insurmountable. UK assets, particularly equities, have been struggling to find supporters for several years now, at least since the 2016 Brexit vote.

“More recently, Sterling and UK government bonds have seen significant weakness, in part due to the pressing issues of the day but also driven by fears over the potential cost of new policy initiatives.

“Notwithstanding the near-term difficulties, we see tremendous value on offer in UK equities currently, particularly in the more domestic areas of the market such as those in the mid 250 universe. Many stocks have been suffering for some considerable time already, despite still trading well, driven by fears of significant economic weakness ahead.

“We are less bearish than many about the economic outlook, and if the new Truss government can not only offer some near-term assistance but set out a credible plan to enhance the future growth potential of a post Brexit UK, then we believe that will be something to cheer about in due course. Difficult, yes. Impossible, we don’t think so.”

Natixis Investment Managers head of multi asset portfolio management James Beaumont

“The issue markets are having with Liz Truss is that she is perhaps not the biggest conviction politician. As a result, it is quite hard to take significant long term bets on exactly what she is going to do.

“In many ways, the UK is a small boat in a big global ocean. At the moment, we are subject to the movements of things that are much more global in terms of driving markets, such as the war in Ukraine and the energy crisis.

“As much as people would like to look to her or blame her, I am not so sure she will have a huge amount of control over what is going on in some of these global macro events.

“We are not expecting Liz Truss to be the driver of the story. She is going to be at the whims of what happens in the wider world.

“She seems to favour some classic conservative values lower tax. We could see some measures that in the medium term could be good for the UK economy, such as trying to stimulate growth, become more competitive, etc.

“in the short term, the financial markets will also test her probably less through equity markets and more through gilts and gilt yields and what happens with Sterling. Those are probably the two markets where Truss and her new government will be scored most carefully.

“Gilt has specifically to do with the government and government borrowing. Truss espouses low tax and small government, but at the same time, the likelihood is that she is going to put off paying off UK government debt and that she’s going to continue to borrow. These are things that gilt markets are not going to like hearing.

“For foreign investors, the way they will express that view of liking or not liking it will be in buying into UK assets and therefore buying Sterling or not buying Sterling.”

Franklin Templeton head of European fixed income David Zahn

“The financial market will focus closely on Liz Truss’s new policies at a time when debt to GDP ratio is at 100% and financial flexibility is limited.

“The gilt market will probably see higher yields as investors wait for clarity from more detailed policies over the coming months.

“Investors will wait for her new policies and cabinet appointments and will penalize increased deficit spending without a plan of how to bring the UK government financial house in order when the demands on the government are very substantial.

“Liz Truss won 57% of the vote so will need to mend fences to bring the party back together.  Her inbox is probably the fullest and with the most acute problems of any prime minister in recent history.

“Truss must deal with a cost of living crisis, an energy sector crisis, supporting the Ukrainian war, a slowing economy heading into recession and an overall need to support businesses and individuals.”