Liz Truss has been named the next UK prime minister after winning the Conservative party leadership voted, besting Rishi Sunak by around 20,000 votes.
The news was unsurprising to some, but there are already concerns that the new party leader may not last more than her two-year term.
This we covered in a piece published earlier today, looking at what the new prime minister Liz Truss might expect during her tenure, beginning tomorrow.
All commentators agree that she will be called upon to address unprecedented economic challenges, as she must deal with 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.
Below, we look at the initial reactions of fund managers and market commentators, to find out what her tenure could mean for markets.
‘Investors will penalize increased deficit spending’
According to David Zahn, head of European fixed income at Franklin Templeton, the financial market will focus closely on Liz Truss’ new policies, especially 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,” he said.
“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.”
‘Interest rates risk should not become a political tool’
Lazard’s head of UK equities Alan Custis, also solicited more financial responsibility.
“The new government faces significant economic challenges and it must act quickly to address them. It must demonstrate financial responsibility to prevent sterling continuing to slide and can do this by maintaining the independence of the Bank of England. Otherwise interest rates risk becoming once again a political tool,” he said.
This is all the more a key focus, given that the UK is sliding down the ranks of the largest economies in the world.
“To reverse this decline, the government must introduce policies that make the UK more attractive for inward investment, including by reversing the recent corporation tax increases and supporting the new freeports.”
On the issue of energy prices, Custis was also concerned with the promised levels of spending.
“In the short term, the government should provide subsidies to energy providers to ensure a maximum price cap that will reduce bills imminently – rather than give money away in an untargeted manner to the consumer – whilst rowing back on the national insurance increase,” he said.
“In the long term, the government needs to make commitments to building renewable capacity and increase private sector investment in infrastructure, via infrastructure bonds.”
‘Freezing the energy cap is the most obvious policy path’
Charles Hepworth, investment director at GAM Investments, was another voice added to the chorus of those concerned by her proposed spending.
“Freezing the energy cap is the most obvious policy path to take and Truss’ much touted tax cuts might bring some relief to consumers, but it is likely still to fall short of re-powering the economy into overnight growth,” he said.
“The current cost of living crisis is historic – the worst fall in living standards in over a century. Equally, the public debt position is at levels once deemed unaffordable – so a spending splurge won’t be viewed favourably by the markets.”
“Unfortunately, Truss isn’t the strongest communicator. Investors, both foreign and domestic, may shake their collective heads after her grace period is up.”
Hepworth also reiterated the commonly shared view that Truss, already known for some quite major U-turns in core beliefs, might end up being “just another exemplar of the recently short-lived Conservative party leaders, unable to corral a party split into multiple factions”.
“The clock is ticking, and sterling will likely come under pressure if Truss fails to deliver a competent and believable vision for the UK economy.”
‘Lis Truss was likely one of the factors leading to the huge surge in UK interest rate expectations over the past month’
With the premise that even general elections have very little discernible impact on financial markets, Ed Smith, co-CIO of Rathbone Investment Management, highlighted the necessity of more fiscal support, preferably highly targeted, and complemented by credible post-crisis growth policies.
“We don’t want to overplay the significance of an intra-party transition: this isn’t 2019, when the leadership contest was effectively a referendum on a hard or a soft Brexit,” he said.
“That said, Liz Truss’ desire to loosen fiscal policy in a fairly untargeted manner (for example through a blanket cut to VAT), increasing debt significantly, is inflationary, all other things equal. Given the backdrop, it will almost certainly be met with tighter monetary policy. This is likely one of the many factors leading to the huge surge in UK interest rate expectations over the last month.”
Smith then addressed the speculation that she will introduce a lower inflation target.
“This risks deflationary problems further down the road, or a nominal GDP target. The latter has some theoretical attraction, but is practically flawed because GDP growth is such an imprecise measure (for one, it’s still being revised years after the period of measurement!),” he said.
“Changing the mandate in response to the last year is somewhat moot: no mandate would likely have achieved meaningfully different outcomes.”