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Challenging times for the new Prime Minister, but there are reasons to be positive for UK investors

  • Bella Edmunds
  • 05 September 2022
  • 5 mins reading time

Since Boris Johnson resigned at the start of July, the various crises affecting the UK have grown: industrial unrest, the cost of living crisis fuelled by higher prices in particular rising energy costs, unresolved issues from Brexit, among others. As these crises have become more acute in recent weeks, the potential to address them has effectively been on hold, as the Conservative Party leadership contest took precedence.

An end to the uncertainty, or more instability?

On Monday 5 September, it was announced that Liz Truss had won the leadership contest and would therefore succeed Boris Johnson as the UK’s next Prime Minster. However, with Truss winning the contest with just 57% of the votes, against Sunak’s 43%, it wasn’t the most convincing of margins, and certainly not the majority that many had predicted. Although markets now have an end to the uncertainty caused by the hiatus of power of the past eight weeks, how much stability will there be in a governing party where almost half of the party members voted for the other candidate?

What markets really need to see is decisive action to tackle the cost of living crisis, an economy predicted to fall into recession by the end of the year, and public sector strike action that looks set to continue.

Cost of living crisis

UK households face an income squeeze in coming months. Inflation – a measure of how much prices of goods and services are rising - is expected to continue to tick upwards for the remainder of the year. The conflict in Ukraine has contributed to the near doubling of wholesale gas prices since May 2022 and this feeds through into the retail energy prices paid by UK households. Interest rates are also on the rise, and this will increase the amount people owe for variable rate mortgages, as well making new fixed-deal mortgage more expensive.

With inflation likely to exceed the 13% peak forecast by the Bank of England, this is an issue that requires the new Prime Minister’s urgent attention.

Recession for the UK economy

The Bank of England is now predicting that the UK will experience a recession (defined as two consecutive quarters of economic decline) lasting 15 months due to the impact of higher interest rates and soaring energy costs. UK consumer confidence has fallen to 50-year lows.

Soaring energy prices affect businesses as well as households, with the double-whammy that there is no protection from a price cap for businesses.

Larger companies will have more tools at their discretion to mitigate some of the rising energy costs, but small and medium sized businesses will be hardest hit. Small businesses have experienced a four-fold increase in energy costs over the past 18 months.

Industrial action

In 2022, we have seen strikes by transport workers, postal workers and barristers, with unrest set to expand to other industries. Both the private and public sector are demanding higher wages to cover the rising cost of living.

The public sector, where wage deals have lagged those in the private sector, is most at risk of further industrial action as we move into the winter and 2023. A wage price spiral, where higher wages cause prices to rise, which in turn causes wages to further increase, is becoming a key risk for the UK economy and the level of the pound against other currencies.

A global, diversified portfolio is key

As UK consumers, the above issues are likely to have a big impact on our day-to-day lives. However, as investors, it’s not all doom and gloom. Portfolios can include many different asset classes spread across many different geographies. This diversification works to mitigate the risks of putting all your eggs in one basket – such as investing just in UK stocks when that economy is headed for recession.

So even though the task for the new Prime Minister is extremely challenging, for UK investors there are still reasons to be positive.

Sources: This article was based on content produced by Schroders Investment Management Limited: ‘Key Challenges facing the UK’s new Prime Minister’, 5 September 2022.

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