A security guard stands outside the London Stock Exchange building on December 29, 2020.
Tolga Akmen | AFP via Getty Images
The UK bond market and the pound plunged this week as investors resented the new government’s fiscal policy announcements, with some analysts believing an opportunity has arisen.
The Bank of England on Wednesday was forced to intervene in the bond market with a temporary buying program as a prolonged gold price surrender threatened pension funds and mortgages and was seen by the central bank as a significant risk to financial stability. it was done.
UK bond yields are well on their way to their steepest monthly rise since at least 1957, but the pound fell to an all-time low against the dollar on Monday.
Viraj Patel, a senior strategist at Banda Research, told CNBC on Wednesday ahead of the announcement that the next few weeks will be critical for investors assessing whether to return to the UK market, but he is yet to see it. not considered.
“Six days ago the pound wasn’t a problem,” Patel said.
He added that the currency and UK bond depreciation represented a vote of no confidence in the government’s fiscal policy and concerns about where sustainable growth could come from in an environment of high and rising short-term interest rates.
“I think some of these doomsday fears are exaggerated to some extent, but I don’t think anyone wants to step in and buy undervalued British assets at this point,” he said.
“The pound is so cheap that in three months we may have another conversation, but I think this is just one of those events before the storm subsides.”
The UK stock market also fell in recent sessions as concerns over more aggressive monetary policy tightening by the central bank and slowing growth sidelined investors, but not as severely as other markets across Europe. There was not. .
Alan Castis, head of UK equities at Lazard Asset Management, told CNBC on Thursday that a general sell-off as a result of the country’s economic turmoil is “not for blue-chip UK companies with earnings abroad. It creates some opportunities in a way.” lb.
Equity analyst watching heifers closely
Long-term UK government bonds, known as ‘Gilts’, have shown historic levels of volatility in recent days after an initial sell-off as prices rose on the back of the Bank of England’s announcement to buy long-term government bonds for two weeks. I’m here. We’re delaying next week’s scheduled gilt sales until October 31st.
Custis said equity analysts are watching volatility in the gold market for signs of where rates are likely to head.
“The market is currently discounting interest rates to rise towards 6%. Before this situation last week, we had probably peaked at 3.75, maybe 3.5%, and inflation was probably in October of this year. We thought it would peak around 11% in November, and now it’s clearly thrown out because we don’t know where the pound will go or how much a weaker pound will cause inflation for the economy.
“For these reasons, stability in the gold market is very important, as it can give some sense of where interest rates will end up. They are all related because they make an impact.Yes, we look at the gold leaf market as much as we look at the stock market.”
UK blue chip FTSE 100 stocks are known for their high dividend yields to investors, but soaring bond yields have made such stocks less attractive, Custis acknowledged, but companies emphasized that 45% of the dividends paid by is reflected in the index. It’s paid in dollars, so it’s somewhat insulated.
This also helps explain why the UK’s mid-cap FTSE 250 index has performed harder than its larger-cap cousins in light of the country’s economic turmoil and currency collapse.
“When I looked at real estate companies in the first few days of this week, the (market capitalization) interest rate on real estate stocks was 4.5%. .”
Chancellor Kwasi Kwarten re-establishes confidence at the heart of the near-term outlook after taking the rare step of omitting forecasts from the UK’s independent Budget Responsibility Office ahead of Friday’s controversial announcement. Analysts suggest that
Kwarteng promised a more detailed and costly implementation plan on November 23. Meanwhile, the Bank of England will meet on November 3 to assess the impact of the fiscal announcement and decide on the size of the next rate hike.
“I think the OBR, the Bank of England and the Prime Minister need to work together to reinforce their goals of reducing financial prudence, tramlines and debt-to-GDP figures. It’s that moment,” he said in November. He added that the joint statement would be a positive signal for the market.
Some analysts highlight that the UK maintains strong fiscal fundamentals, supporting bond and currency barriers, but many are reluctant to dive in until the smoke clears .
Seema Shah, senior global investment strategist at Principal Global Investors, said investors are assessing whether the UK remains an attractive long-term investment destination alongside other developed countries. said.
“For the US, on the other hand, I think it’s going to be an overwhelming yes for the next 10 years. Stocks will be higher than they are now,” she told CNBC on Wednesday.
“For the UK, it’s probably a bigger question how high they will go, and do we really believe that the UK will move forward as a place we want to put money in?”
