Image source: Getty Images
UK stocks have pushed lower over the past month amid recession forecasts and renewed concerns over Europe’s gas supply. But that’s not the only thing moving the markets.
As of this writing, Liz Truss is set to take office as the UK’s third female Prime Minister. Truss aims to tackle the UK’s woes with a spending package comparable to Covid-19 furlough spending.
So what could all of this mean for UK equities and my portfolio?
More expenses
Generally, there are concerns about his mix of big spending plans, not to mention plans to change the remit of the Bank of England. The pound and UK bonds are lagging behind most other major economies.
Truss’ spending commitments, which include raising defense spending to nearly 3% and promised tax cuts, are expected to push inflation higher. Calculations by the FinancialTimes suggest the new prime minister could create a £60billion hole in public finances by 2026 as inflation and debt soar.
Higher inflation
Inflation is expected to approach 20% at the start of 2023. Some analysts believe it could reach 23%, although it should be noted that inflation excluding energy prices will be much lower.
Analysts suggest that Truss’ spending plans could accelerate the path of inflation. This could therefore require higher interest rates sooner.
Inflation presents a major challenge for many UK stocks. Retailer margins are being squeezed and some are struggling to pass these costs on to customers. For example, low-cost supermarkets that do not have pricing power may have to absorb more of these costs, as their customers continue to expect lower prices.
It could be the same for the actions of the restoration. Some brands, such as those owned by The catering groupmight struggle to pass on costs as they are not perceived as high end dining options.
This is how I prepare
I think we’re going to see a lot of volatility this fall with energy issues and political shifts pushing markets up and down.
I take a rather defensive position. I look at UK banks such as Lloyd’s, NatWest, close brothers Band and Barclays. We have already seen higher interest rates translate into higher profits for banks. And with interest rates set to rise further, I think we could see a period of record earnings. I understand that credit quality can go down, but higher rates are a big problem for banks.
I also look at defensive values such as Unilever and Haleon. Both companies have a host of household brands, which is seen as a positive when it comes to passing on higher costs to customers. Shoppers tend to stick with brand name products even when times are tough.
I also like these actions because they have an international scope. With the weakening of the British pound, it is good to have overseas income as it will inflate income once converted back to GBP.