After one of the most turbulent and chaotic periods in British political history, Liz Truss resigned as prime minister of the UK today after less than two months in office.
It’s not often we see a country’s leader be thrown out by the financial markets, but that’s essentially what’s happened here.
After being elected on a platform of low taxes and high growth, Truss and her hand-picked chancellor, Kwasi Kwarteng, put forward a plan to slash taxes at the end of September.
The mini-Budget caused havoc in the financial markets. The value of the pound plunged and government borrowing costs spiked, forcing the Bank of England to step in and calm investors.
That wasn’t enough and Kwarteng was forced to resign. His successor, Jeremy Hunt reversed virtually all of his budget changes after only a couple of days in office.
With the economic plan dead in the water, Truss quickly lost the support of her party and the country. The markets had won.
Liz Truss resigns and markets shrug
The market reaction to the PM’s departure can only be described as somewhat of a collective shrug.
Government bond yields have increased slightly, but they are nowhere near the levels recorded following the mini-Budget. In fact, they’re back where they were before the tax cuts were announced.
Meanwhile, the value of sterling against the US dollar is up around 0.5% at the time of writing. However, this is mainly down to US dollar weakness. The euro is also stronger against the US dollar.
There was a more robust reaction in the equity markets. The FTSE 250 index, which is often used as a gauge of UK economic health, jumped nearly 1% after the announcement, although it quickly pared any gains.
This muted market reaction suggests many investors were already anticipating this outcome. They’re now waiting to see what could happen next.
UK stocks are cheap – should you buy now?
At this point, it’s difficult to see how the situation could worsen.
The country is facing one of the worst economic climates it has seen in over 50 years. The war in Ukraine shows no sign of abating and there’s no one to steer the ship.
And this could present a great opportunity for those investors who are willing to go against the herd.
Last week, Barclays published a report showing that more money flowed out of UK equities this year than any other point on record. Investors have been pulling their cash from the country since the Brexit vote in 2016, although this year the trend has really accelerated.
The consistent selling has pushed UK equity valuations down to the lowest on record compared to global peers. According to analysts at JP Morgan, the average forward price/earnings (p/e) ratio of companies in the UK is 8.6 compared to 16.3 for the US.
Unfortunately, UK equities are likely to remain cheap until we know more about what’s going to happen next. Unless the country is able to pull it together and bring in a new prime minister that can bring stability to the Tory party, investors are likely to stay away.
Stability really matters to businesses and investors around the world. There’s been none of that in the UK this year.
Still, that doesn’t mean investors should avoid UK equities. There are some companies that look dirt cheap, but also generate most of their incomes outside the country.
These may be the businesses to target right now. The political turmoil has made them cheap, but they are unlikely to suffer if the UK economy enters a recession. If stability is restored, these companies are the most likely to gain confidence and international investors return.
Companies with more exposure to the rest of the world than the UK include catering group Compass, oil group Shell, financial services company the London Stock Exchange, consumer goods producer Reckitt and healthcare giant AstraZeneca.
Why did Truss quit?
Truss, who has served as Prime Minister for the shortest period on record, quit after her mini-Budget failed – despite aiming for growth, it rattled the financial markets and caused further economic turmoil. One of the biggest casualties was the mortgage market, where we saw several mortgage lenders pull their rates, only to come back with significantly higher deals.
Mortgage rates are now at their highest in 14 years, with the average two-and five-year fixed at 6.65% and 6.51% respectively. This has left many people facing unaffordable mortgage costs and some potential buyers wondering if now is a good time to buy a house.
Both Truss and Kwarteng, the chancellor at the time, also announced several tax cut measures, but they have since been scrapped by the new chancellor, Jeremy Hunt.
Earlier this week, Hunt ripped apart Kwarteng’s mini-Budget, which included ending the Energy Price Guarantee in April 2023 instead of October 2024, but promising more targeted support when it ends.
IR35 changes, corporation tax, and dividend tax changes were also scrapped.
The £400 energy grant, stamp duty cuts and National Insurance cuts will stay in place,
With inflation now above 10% and the cost of borrowing rising, there are concerns that markets will only stabilise if there is a general election and a stable government in power.
Who will be the next UK prime minister?
We do not know yet who will replace Truss, but we can expect to hear more about who will be the next Conservative leader in the next few days.
Truss’s successor will be elected through another leadership contest next week.
Some names thrown into the hat so far are: Rishi Sunak, who marginally lost the leadership contest against Truss last month; Penny Mordaunt and Ben Wallace, the defence secretary.
