The opinions of these bondholders, otherwise known as ‘gilts’, matters, and they have significant leverage.
This was seen more generally during the short-lived Truss/Kwarteng government, and more precisely following their September Mini Budget, where the bond, equity and currency markets began to collapse under selling pressure in face of huge negativity triggered by the potential of unfunded tax cuts and more widespread credibility concerns.
FTSE 100 rally may persist despite mounting economic pressures for the UK
The message was simple: with public debt of £2.5trn, the actions of the United Kingdom matter, especially if you want to come back for more financing and maintain stability in the financial markets. The treatment was decisively harsh and waived any niceties that may historically have been applied when dealing with one of the largest global economies.
As lenders to the UK plc, these bondholders arguably have different priorities compared to the general stakeholders.
They are looking for relative stability, especially with the currency and inflation, with smooth coupon payments and at maturity.
This is somewhat different compared to the broader stakeholders, including UK equity owners, who will also be looking at the smooth execution of the UK business plan with the ability to ‘grow’ and outperform other geographical opportunities.
The nuance is important, especially if the government or C-suite becomes overly focused on stability and the status quo, or the wishes of their bondholders, at the expense of growth and the general stakeholders who are footing the bill for this ‘stability’ via ever-growing tax demands.
As with many things, this is about achieving balance.
For now, Chancellor Jeremy Hunt and Prime Minister Rishi Sunak, CFO and CEO respectively, have received many plaudits for the steadying influence they have delivered, and the broader financial markets have responded positively for the time being.
But looking ahead, it is difficult to build a sustained business case for UK plc if the approach is purely stability, cost cutting and raising taxes. This seems like a sure route to a managed decline and all the difficulties that brings.
The old adage when analysing publicly traded companies is that it is difficult to ‘cut your way to glory’, with the cut referring to only reducing costs, and this applies here.
Finding balance
This brings us to the argument around the growth part of the Truss/Kwarteng Mini Budget.
The message around growth and reducing the tax burden became lost in the overall furore of the unfunded tax cuts, the debate around ‘Trussonomics’ and the spectacularly poor delivery of the message.
For the UK to deliver on its full potential, it is important to maintain a balance between growth and stability.
The growth strategy has to be clearly articulated in an effective manner with a focus on the drivers that deliver maximum returns including the bravery to review and if necessary, tackle ‘sacred cows’.
Equity holders, in the general sense of the world, will be rightly suspicious of tinkering to grab headlines.
Halfway measures have the risk of planting the UK in ‘no man’s land’ – neither a growth nor value play with limited leverage over the bondholders who effectively have the dominant hand.
This is about bold moves and a big numbers game, anything else will get lost in the main driver of managing the debt burden which includes further borrowing.
The demographic picture for the UK is also a key element for policy holders to continue to focus on.
An ageing population narrows the strategic options, and it is important that the younger generation sense and experience the upside that was enjoyed by their forebears.
This growth should be structural and more than just stimulus led with the boom and busts that come with this.
In time, this will be linked to the already discussed theme of bold and considered plans and the ability to openly debate options including the ‘sacred cows’.
This article has discussed glory with reference to the difficulties of ‘cutting your way to glory’ and now we include hope, an all-important characteristic of growing and vibrant economies.
In the absence of these bold and considered plans, the UK will be a good client of the ever dominant bond market but will squander the most compelling part – the growth story and the vitally important associated upside.
Charles White-Thomson is CEO of Saxo UK
