The spotlight so far this year has been on the vulnerability of UK assets. In this week’s Perspectives, Anthony Rayner looks at how the UK authorities are much less in control of their own destiny.
As global investors based in the UK, one of the first challenges is to be dispassionate about one’s home market. Of course, this is almost impossible but to recognise one’s prejudices is always a good start.
It becomes particularly important at times like these, when the spotlight is being shone brightly over the UK political, economic and financial situation. For example, it’s impossible to dispute that the current Chancellor has certain Marmite-like characteristics, but Chancellors often do and, whilst credibility is relevant, popularity isn’t especially so, at least not for a few years.
Either way, when emotions run high, it always helps to go back to the data. The graph below is helpful in this regard. The two vertical lines represent the election and the Budget. The headlines have homed in on the surging gilt yield since September but, tellingly, the spread vs the US Treasury yield is largely unchanged over that same period. Similarly, up until the end of December, sterling, UK equities (represented by the more domestic FTSE 250 Index) and UK CDS 10 year (a measure of UK sovereign credit risk, inverted) all remained fairly stable.
UK assets showing some signs of stress this calendar year
Past performance is not a guide to future returns
This calendar year has been a slightly different matter, as seen in the graph: sterling, equities and UK sovereign credit risk are all showing signs of stress, not extreme stress but definitely some stress.
So, what’s going on? The rise in US Treasury yields is putting pressure on a number of financial markets, especially where there is some vulnerability, and this is not confined to the UK.
Interestingly, and perhaps worryingly, the stress in UK assets in January is not traced back to a particular event but a more general concern around the huge debt pile and, more specifically, the recent dynamics of higher debt servicing costs and a fading UK growth outlook.
In short, the outlook for the UK fiscal situation has become more finely balanced and the authorities are much less in control of their own destiny. Of course, we’re not the only government with a poor fiscal situation, take the US for example, but they have a decent growth outlook and the world’s reserve currency.
The question remains as to whether higher yields will break something and, if they do, whether the subsequent “whatever it takes” comment from the Bank of England works to calm nerves. In the meantime, the spotlight will remain on any mis-steps.
From our perspective, the risk of holding UK assets has increased and, as a result, the macro thematic multi asset portfolios are very limited in their exposure to UK assets. There is minimal exposure to UK equity, including the more domestic FTSE 250 Index, very limited exposure to gilts, a lower than usual exposure to sterling and some exposure to sterling corporate bonds, but very much dominated by short duration investment grade bonds, thereby limiting interest rate and credit risk.
The risk outlook for UK assets will improve at some point and, when it does, we will endeavour to be as dispassionate and pragmatic as we are about other assets.
RISKS
The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.
Forecasts are not a reliable indicator of future returns.
The Premier Miton Cautious Monthly Income Fund and the Premier Miton Multi-Asset Growth & Income Fund may experience high volatility due to the composition of the portfolio or the portfolio management techniques used.
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