Mon, Sep 05, 2022 page11

• Stock slump headache for new UK PM

  BLEAK PICTURE: British companies face rising costs while their customers head into a cost of living crisis, as the likely next prime minister, Liz Truss, plans inflationary tax cuts

  • Bloomberg
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  British stocks have had a rough year. With recession looming and the pound plunging, it is hard to see how troubles might ease before a new British prime minister is sworn in.

  Britain’s mid-cap index — made up of companies that are heavily dependent on the local economy — is down 20 percent this year, on course for a record annual underperformance against the exporter-heavy FTSE 100.

  The steep losses show investor pessimism has set in over the economy, with the Bank of England saying a recession could stretch into 2024.

  

  British Conservative Party leadership candidate Liz Truss speaks at a campaign event on Wednesday.

  Photo: Reuters

  “The FTSE 250 does clearly have its challenges,” AJ Bell investment director Russ Mould said. “The UK economy is faced with the difficult combination of high inflation, slowing growth, rising interest rates, weak consumer confidence and substantial debt piles at the national and consumer level.”

  UK consumer price inflation breached double digits for the first time in 40 years in July, with Goldman Sachs Group Inc subsequently saying that it could top 22 percent next year if natural gas prices remain elevated.

  Against that backdrop, the domestic index had its worst losing streak since the pandemic-driven rout in March 2020, while investors are turning more negative on UK stocks.

  A net 15 percent of global fund managers are underweight the country’s equities, up significantly from 4 percent in July, according to a Bank of America Corp survey last month.

  Underpinning the weakness is the UK’s crumbling currency, with the pound trading near its lowest since 1985. While that is a boon to the exporter-heavy FTSE 100 — a surprising investor favorite this year due to its exposure to energy and banks — it means local companies face rising costs just when customers are dealing with a cost-of-living crisis.

  It all adds up to a bleak economic picture for a new British prime minister. British Secretary of State for Foreign, Commonwealth and Development Affairs Liz Truss is the front-runner in the race, and many investors have criticized her proposed tax cuts as inflationary.

  Cuts “will help hard-pressed consumers in some ways, but also risk stoking inflation in a manner that threatens to force the Bank of England’s hand when it comes to rate rises,” IG Group PLC chief market analyst Chris Beauchamp said.

  “Truss faces the mother of all policy headaches,” he added.

  Among stock market sectors, investors are particularly cautious on UK homebuilders, utilities and retailers.

  Companies like Persimmon PLC and Barratt Developments PLC have seen their market values cut in half this year as the Bank of England kicked off a program of rate hikes to combat inflation, while the FTSE 350 Retailers Index has sunk about 35 percent, reflecting Britons’ shrinking disposable incomes.

  “Mortgage rates have surged this summer and are set to prompt a plunge in housing demand and lower prices from this autumn,” HSBC Holdings PLC analyst John Fraser-Andrews wrote in a note on Friday as he downgraded seven homebuilders.

  Utilities could also struggle, “particularly electricity and gas suppliers as they appear at the heart of the cost of living crisis,” Waverton Investment Management Ltd equity research head Tineke Frikkee said.

  Retailers, meanwhile, will be hoping the new prime minister announces support for households, freeing up cash for non-discretionary spending.
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