What is happening in the UK market (Oct 2022)?
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
It is probably fair to say that we have not seen political instability like this for some time. At the time of writing, Chancellor Kwasi Kwarteng has been sacked – only three weeks after publishing his new Mini-Budget. His replacement, Jeremy Hunt, has effectively reversed many of his policy changes. Corporation tax will still rise to 25% in April 2023 (on profits over £50,000), the Basic Rate will remain at 20% for now (rather than falling to 19%) and the 45% additional rate will now stay in place. Naturally, this has raised questions about the UK’s true economic plan as it faces a winter of high energy prices, the possibility of rising interest rates and stagnant growth in GDP (gross domestic product).
Below, our financial planners at Castlegate in Grantham offer a survey of some key, recent events in the markets and how these may affect investors. We hope you find this content helpful. If you want to discuss your financial plan, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
The Bank of England and bond markets
On Friday 14 October 2022, the Bank of England (BoE) stopped buying UK government bonds (gilts) after its £65bn purchase promise in late September. It did this to restore confidence in the government’s finances after worries over the Mini-Budget tax cuts, and to stop a pension fund collapse (since many invest heavily in gilts). Now that the BoE bond purchase programme has stopped, there are signs that the market tension is starting to abate.
UK interest rate increases
The BoE raised the base rate to 2.25% on 22 September 2022 as it fought to stop growing inflation. The next meeting of the Monetary Policy Committee (the BoE’s decision-making body) is on 3 November 2022, during which the base rate could be raised even higher. The markets appear to have already priced in this expected rise, as well as further rises into 2023 (e.g. 4% or over by mid-2023). It is still possible that markets may be caught off-guard, however, if rates rise higher or sooner than expected. Mortgage borrowers could also see monthly payments go up if interest rates rise, since high street banks and building societies use the base rate to set their own rates for customers.
UK growth forecasts
The UK economy contracted in August 2022 and the economy could shrink further in the third quarter (Q3) of 2022. If two consecutive quarters of negative GDP growth (gross domestic product) transpire, then the UK would enter a recession – which the BoE forecasts the UK to enter by the end of the year. If you are at all concerned about this, then we suggest speaking with your financial adviser. It is important to take a long-term view with your investments and to not make impulsive decisions with your portfolio.
The weak British pound
The pound (GBP) fell to an all-time low of $1.0327 in late September and is significantly lower compared to where it stood at the start of 2022 ($1.34). The weak GBP creates both risks and opportunities for investors. On the one hand, investing in foreign assets (e.g. US shares traded in US dollars) will be more “expensive” to buy due to the weak currency conversion. Conversely, the foreign investments you have already built up may be worth more money. This highlights why it can be beneficial to have a globally-diversified investment portfolio – not just one which holds different domestic assets.
The US economy
Given the huge size of the US economy, events in that country typically have a large “spillover” effect on the rest of the world. If the US enters a recession, for instance, then this could pull a host of other countries down with it. Fortunately, the US is currently enjoying a strong labour market (despite high inflation) and a recession does not appear imminent. However, the Fed (Federal Reserve) has raised the US “base rate” several times in 2022 already and may push them up further in the coming months to try and control rising living costs. This would put more pressure on other nations’ central banks to raise their own rates, which would make it costlier for companies and consumers to borrow money.
The UK housing market
Many investors will remember (sorely) how the 2008 Financial Crisis was largely caused by a crash in the US housing market. Investors, therefore, are often interested to know what the UK housing market looks like and how it might affect their portfolios. Certainly, in 2022 mortgage borrowers – including landlords – are facing greater financial pressures as interest rates go up. Should rates rise too high, this could spark a sharp drop in property prices. Some analysts have warned that prices could fall by 15% in 2022, but a “crash” in the property market is still widely seen as unlikely (although the high rate of growth seen in recent years may “dampen”).
Invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
