Investors cautiously add risk between Hunt’s budget statements

Investors cautiously add risk between Hunt’s budget statements

• Political uncertainty following Kwartang’s mini-budget increased interest in safe-haven funds
• Following Jeremy Hunt’s first statement, investors have cautiously added risk
• Rising borrowing costs has spiked interest in UK bonds
   

Kate Marshall, Lead Investment Analyst, Hargreaves Lansdown:

“Political flip-flopping has become par for the course in the UK this year. Within the space of four months, we’ve seen four chancellors come and go – unprecedented in British history.

Kwasi Kwarteng was in office for just 38 days, the second shortest serving chancellor in history. His mini-budget in September included £45bn of unfunded tax cuts, leading to stock market turmoil, a fall in the value of the pound and rises in gilt yield and mortgage costs.

To calm markets and help tackle soaring inflation, the UK government made a u-turn on the mini budget. Initially the government reversed its pledge to cut the top rate of income tax and, following Jeremy Hunt’s appointment as chancellor, further policies were cancelled.

While this helped to calm market nerves somewhat, it’s been difficult terrain for investors to navigate. Investor sentiment has been impacted and is reflected in fund flows on the HL platform.

From the announcement of the mini-budget on 23 September until the government u-turn, £226m was pulled from funds. But from the cancellation statement until the present day, we have seen almost £100m of inflows.

There are similarities between the sectors favoured during these timeframes. The US has continued its reign, holding up relatively well this year amid the turmoil and beating most major global equity markets. Global equity income funds have remained in favour by those in need of a regular income, but who do not wish to only be exposed to UK dividend-paying companies. On the flipside, more cautious investors have favoured money market funds, which include cash and short-term debt.

While market turmoil ensued following the mini-budget, some investors took the opportunity to invest in UK gilts (government bonds) at lower prices and higher yields. And following the u-turn, bond investors upped their risk appetite to invest more in corporate bonds issued in sterling. We also saw increased interest in specialist funds, which include resources and energy funds that have benefited from rising commodity prices this year, as well as infrastructure funds.

The government is expected to announce billions of pounds worth of spending cuts and tax rises on tomorrow. This could impact household incomes, potentially making life even harder if tax bills and energy costs continue to rise. Where investors put their money from here could reflect any change in sentiment towards the UK.”