There was a silver lining to Kwasi Kwarteng’s “disastrous” mini-Budget, according to Andrew Cowley, manager of the Impact Healthcare trust, although investors must look hard to find it.
The trust invests in retirement homes by buying, renovating and leasing them out to tenants, and was “firing at all cylinders” until 23 September 2022, when the infamous Autumn Statement was announced.
“In the autumn we had interest rates rising and the particular joy of a mini-Budget that didn't go very well,” he said, which forced Cowley to administer a dose of “bitter medicine” to his trust.
“We had to have a hard look at our portfolio in the fourth quarter of 2022. We marked down the value of our holdings by 4% on December 31, which took our yield up 30 basis points. We took the medicine and now we're feeling on much firmer ground.”
Last year UK assets tanked as the then-chancellor unveiled big plans to grow the economy without clear ways to afford his ambitious strategy.
From 23 September to 14 October (the mini-Budget to Kwarteng’s eventual resignation), the FTSE All Share index was down 2.7%, although the market tanked throughout his tenure, as the below one-year chart shows.
Total return of index over 1yr
Source: FE Analytics
The former chancellor’s faux pas has been a turning point for the real estate market however, Cowley argued, leading to big changes in the sector that could even be viewed as positive, although he conceded that he is “always a bit too optimistic”.
“It was very painful, but the whole market was forced to reprice in one go, whereas in some other markets globally, it's going to be a more gradual process. I think the mini-Budget last year was the absolute disaster, but disasters can sometimes have helpful consequences,” the manager said.
Antony Webb, deputy head of managed portfolio services at Quilter Cheviot, was unconvinced and said this might be too optimistic a view.
“The overall impact of the Kwarteng Budget was a loss in confidence in the fiscal prudence of the UK. Unfortunately it is impossible to prove how permanent this loss of confidence was, as there is no counterfactual, meaning that we cannot know how gilts and sterling would be priced if this event hadn’t occurred,” he said.
“It is tempting to look at gilt prices and exchange rates from certain times before and after the mini-Budget and conclude that the UK financial system has been given a good shake, assets have been re-priced and have settled at a healthier level, with no further impact. However, the uncertainty around UK economic fortune is difficult to price explicitly.
“What we can see is that UK 10-year gilt yields are at similar levels to 10-year treasuries in the US, despite much lower OECD [Organisation for Economic Co-operation and Development] and IMF [International Monetary Fund] economic growth forecasts, and that in most instances UK companies are valued at a discount relative to their international equivalents.”
The uncertain economic outlook for the UK and sterling is the likely contributing factor to the discount on UK assets, he argued, noting that the mini-Budget only shook investors’ confidence in the market.