At the beginning of this year Boris could surely not, in his worst dreams, have imagined that before Halloween he’d be out of office and superseded by not one but two new Prime Ministers. I doubt Rishi Sunak would have pictured himself in the hot seat either. But there it is. Not for the first time the Conservative party has torn itself apart and, with just two years to go before the General Election, the time to repair the damage is rather short.
The first job for the new dynamic duo of Sunak and Hunt has been to calm the currency, bond and stock markets and they have certainly succeeded in that regard, aided by a slight weakening in the US Dollar. However, on the assumption that Sunak left the state finances in reasonable shape when he departed No 11, it is very hard to see how the figures have deteriorated so badly as to leave the size of black hole now being discussed, especially as the prospective cost of the energy support schemes will have fallen sharply with the recent decline in the oil and gas prices. Something doesn’t quite add up.
Governmental budgets are built on assumptions rather than facts. Could it be that Batman and Robin, with Truss and Kwarteng offered up as the perfect scapegoats, are making the worst possible assumptions across the board? This could provide them with the excuse for a short, sharp burst of austerity to put the public purse in a super-strong position so that, by 2024, a pre-Election budget can offer us the promise of goodies all round. They could even take the credit for reducing inflation even though, as these pages have suggested several times recently, the cures are already in the system. There may be a bit of a lag but last week’s improved US inflation numbers will, in our view, be followed in the new year by signs of a more general peak having been reached, including in the UK. Will Sunak and Hunt get away with it in time for the next General Election, which must be held by January 2025 at the latest? Possibly but I’m not sure the electorate’s memory is that short these days. We shall see. But please, Mr Sunak, if you are to be representing us on the world stage, buy a few suits that actually fit you? You might be the youngest Prime Minister in modern political history but you are no longer 18!
Market Update
We said some months ago that the interest rate peaks then being talked about (5%, 6% and more) were likely to be too pessimistic. A peak of around 4.5% is now the favoured figure and that sounds a far more sensible outcome in our view. Peak to trough, most major stock market indices fell well in excess of the minimum 20% that determines a bear market so it is not unreasonable to be anticipating a bottom at some point. The first sign of a downturn in the UK’s inflation rate is likely to coincide with a wider spread acceptance of the interest rate peak. That could be the catalyst for a strong recovery in both the fixed interest and equity markets. We do not envisage a two-year recession as has been suggested by the Bank of England but something rather shorter.
The average earnings multiple of the FTSE 350 index constituents is around 10 times which seems an overly cautious rating. It would only take a small improvement in confidence to see a 2 to 3 point improvement in this figure and that is likely to develop quite quickly in the above scenario. It is time to consider dribbling funds into the market, in our view, particularly on weak days.
Two investment trusts we have been dipping our toes into of late are:
City of London Investment Trust (CTY) – Established in 1861 and a FTSE 250 constituent, the fund as well as being a strong performer prides itself on paying and increasing the dividend, which it has done for many years. With a dividend yield of just under 5% and trading at near net asset value, we class this as an attractive UK equity investment for those with a moderate risk appetite and medium-term outlook. Current offer price 403p.
Brown Advisory US Smaller Companies (BASC) – For those wanting US exposure. The fund was previously run by Jupiter until Brown Advisory took the helm. A very good team with a lot of experience. The fund is focused on US smaller companies so offers a wide investment universe. The US deem billion-dollar companies as small and the Brown team class $800 million market capitalised companies as the low end. The shares, currently 1295p, stand at a 12% discount to net asset value. The fund is smaller in size therefore comes with a risk appetite of moderately high.
Russell Dobbs FCSI
Chartered Wealth Manager
