Those who attain high positions tend to be targets for those whose lives they impact and, let’s face it, we all enjoy having a pop when we feel hard done by. We’ll ignore Boris who is always in someone’s cross hairs but the recent performances of two high-ranking individuals have drawn understandable criticism from many quarters. Is it justified?
Andrew Bailey didn’t exactly cover himself in glory whilst Chief Executive of the Financial Conduct Authority so his appointment as Governor of the Bank of England raised a few eyebrows. He had only been in the first job five minutes when a few loose words had the unintentional consequence of torpedoing the share prices of the entire Life Assurance sector. A lesson learned perhaps? Maybe not.
Whether one agrees with it or not the main mandate of the BoE is to maintain an inflation rate of circa 2% with a reasonable level of flexibility over a given period. Straying too far from the target for too long necessitates a letter of explanation to the Chancellor of the Exchequer. We are all aware the world is currently facing an exceptional accumulation of circumstances driving inflation to worrying levels so a sizeable breach of the 2% target was a surprise to nobody. However, when explaining the situation, it is critical the BoE exudes a level of confidence to sooth the public’s nerves. Mr Bailey’s explanation to the Treasury Select Committee earlier this month spoke of “apocalyptic” food price inflation and 80% of the target overshoot caused by factors outside of the BoE’s control. On the latter point he is correct and it is a view we have expressed in these pages but the use of such scary language does not instil the public with confidence – quite the opposite.
At least he appears to accept that raising interest rates is not a cure for many of the inflation drivers so we would expect a certain amount of circumspection vis-à-vis the trajectory of interest rate rises to come. However, the Bank’s Monetary Policy Committee, which sets those interest rates, comprises nine panellists, five from the BoE and four external members with a variety of views. Mr Bailey may have to resort to a few more scary words to them in their next meeting.
The other individual in question is the Chancellor himself, Rishi Sunak. I’m not going to comment on his wife’s Non-Dom status save for the fact that, in his position, he should have seen the problem coming. That he didn’t is concerning. His introduction of an additional 1.25% National Insurance charge at a time of such clear hardship amongst so many working people has been described as cruel. I’m not going to argue. The recent announcement of a windfall tax (sorry, levy) on the oil and gas industry is a lazy plan.
In troubled times governments often have to resort to unpopular strategies but neither of the above are the stuff of a Conservative Chancellor. Overly buoyant prices in any commodity tend to be transient and will inevitably be followed at some point by the reverse. A windfall tax on the best periods kills investment, long-term planning and dividends, the last of which are crucial to pensioners in straitened times such as these. BP is already reviewing its previously announced North Sea investment plans. It is only a few years ago that oil was below $20 per barrel and for one very brief period you couldn’t give it away. The good times don’t last forever and I don’t suppose Sunak intends giving the windfall back in the next downturn. If he wants the industry investing for the nation’s future then it needs consistency of government policy to allow sensible planning.
The public coffers are in reasonable shape bearing in mind the awful couple of years the economy went through. More thought to fiscal innovation rather than trotting out ideas peddled by Jeremy Corbyn and his pals would be preferable.
As far as markets are concerned it looks as if we still face a few choppy months. However, the badly hit technology sector has been noticeably firmer in recent days and, if this becomes a reasonable rally it may take the shine off the value stocks that have moved to the fore in recent weeks. Sterling continues to show weakness versus the US Dollar meaning two things – 1) a boost for UK exporters of goods and services into Dollar denominated markets and 2) UK companies that are constantly in the eye of US predators (many of them the exporters of those goods and services) have become even cheaper to those potential bidders. For that reason we still expect UK equities to be amongst the better performers.
One such stock we feel worth noting is Glaxo ahead of the demerger of its consumer healthcare division, named Haleon, in a few weeks time. Haleon’s estimated worth is approaching £40bn leaving the rump of Glaxo, concentrating on vaccines, treatments for HIV, cancer and respiratory problems with a value of circa £50bn based on today’s overall market value. Shareholders will receive one new Haleon share for each Glaxo share held and will own two FTSE 100 constituents instead of one. Each company will present a more manageable target for those lurking US predators. In the meantime Haleon is likely to be the dividend payer while Glaxo invests in necessary research and development.
Existing shareholders may wish to increase their investment as they will end up with two investments of lesser weighting. The current price of around 1730p also offers an attractive entry point to new holders in our view.
Russell Dobbs FCSA
Chartered Wealth Manager
