A security guard stands outside the London Stock Exchange building on December 29, 2020.
Tolga Akmen | AFP via Getty Images
UK bond market and pound fell into free fall this week as investors balked at the new government’s fiscal policy announcements and some analysts believe opportunities are emerging.
The Bank of England on wednesday is forced to intervene in the bond market with a temporary purchase program, for the investment of long-standing gilding pension fund at risk and mortgages, posing what the central bank sees as an important risk to financial stability.
UK bond yields are trending their biggest monthly slant since at least 1957, while sterling fell to an all-time low against the dollar on Monday.
Viraj Patel, senior strategist at Vanda Research, told CNBC on Wednesday ahead of the announcement that the next few weeks will be critical for investors to gauge whether to return to the UK market, but he still hasn’t considered.
Patel said: “The pound six days ago was not an issue for me. I’m looking at a bunch of other currencies that are getting more mixed up in the market.”
He added that the drop in the UK currency and bonds represents a vote of no confidence in the government’s fiscal package and concerns about where sustainable growth will come from in the interest rate environment. short-term high and rising.
“I think some of these apocalyptic fears are overblown to some extent, but I don’t think anyone wants to step in right now and buy undervalued assets. of the UK at this time,” he said.
“We could have another conversation in three months because the pound is incredibly cheap, but I think that’s just one of those things when the storm precedes calm.”
The UK stock market has also sold off in recent sessions, though not to a deeper extent than in other markets across Europe amid a global downturn in equities, fueled by fears of tightening. Stronger monetary policy tightening from central banks and slowing growth forced investors to stay on the sidelines. .
Alan Custis, head of UK equities at Lazard Asset Management, told CNBC on Thursday that the overall sell-off as a result of the country’s economic turmoil “in some way offers some opportunity. ” for British blue-chips with overseas earnings, who benefited from the pound drop.
Stock analysts keep a close eye on gilts
UK long-term bonds – known as “backward bonds” – have seen historic levels of volatility in recent days, with prices rising from their initial collapse after the Bank of China The UK central bank announced that it will buy long-term bonds for two weeks and delay next week’s scheduled gold-plated sale until October 31.
Custis said equity analysts are closely monitoring volatility in the gold-plated market for signs of where interest rates may be headed.
“The market is now discounting rates up to 6%. Given this situation last week, we probably thought 3.75, maybe 3.5% would be the top, inflation could peak in May. October or November this year around 11%.Now obviously, that’s been dropped, because we don’t know where the pound is going, how a weak pound could be inflationary for the economy. economy,” Custis said.
“Stability in the gold-plated market is important for those reasons, because it can give us some sense of where interest rates could eventually land and obviously that will have an impact.” It’s big on mortgage rates and consumer spending, so it’s all related, so yes, we track the gold-plated market just as much as we track the equity market.”
British Blue Chips FTSE 100 Custis admits it’s known for its high dividend yields for investors, but with bond yields soaring, the appeal of these stocks is waning, but he stressed that 45% of dividends are paid out. by the companies in the index are paid in dollars. Insulate it to a certain extent.
This would also help explain why the UK average cap FTSE 250 index has had a tougher run amid economic turmoil and the country’s currency collapse than its large-cap cousin.
“When we saw it with real estate companies in the first few days of this week, the (capitalization) ratio in real estate stocks was 4% and a half – if you have interest at 6%, it’s very hard for real estate stocks to look attractive.”
Analysts say the focus of the near-term outlook is on Finance Minister Kwasi Kwarteng to re-establish credibility, after taking the rare step of ignoring forecasts from the independent Office of Budget Responsibility. British establishment before Friday’s controversial announcement.
Kwarteng promised a more detailed and costly implementation plan on November 23, while the Bank of England met on November 3 to assess the impact of fiscal announcements and determine the size of the crisis. next interest rate hike.
“I think we need to see the OBR, the Bank of England and the UK Prime Minister come together and once again reinforce fiscal prudence, tram routes, aimed at reducing debt to GDP. – although we’re in a pretty strong position at the moment,” Custis said, adding that a joint statement in November would be a positive signal for markets.
Although some analysts have emphasized that the UK maintains strong fiscal fundamentals and supportive barriers to bonds and currencies, many are still reluctant to return to until it turns to smoke.
Seema Shah, senior global investment strategist at Global Investments, said investors were assessing whether the UK would continue to be an attractive investment destination in the long term alongside other investments. other developed economies or not.
“While for the US, I think that’s a resounding yes over the next 10 years – stocks will be higher than they are now,” she told CNBC on Wednesday.
“For the UK, perhaps the bigger question is how much higher they will be, and do we really believe the UK will move forward as somewhere we want to put our money. are not?”
