A security guard stands outside the London Stock Exchange building on December 29, 2020.
Tulga Akmen | AFP via Getty Images
UK bond markets and fairy The market went into a free fall this week as investors held off on the new government’s fiscal policy announcements, and some analysts believe opportunities are emerging.
The Bank of England Wednesday was They had to intervene in the bond market With a temporary purchase program, as a surrender to the old gold prices Threatened retirement funds and mortgages, posing what the central bank saw as a material risk to financial stability.
British bond yields are on track for their highest monthly rise since at least 1957, while the pound fell to an all-time low against the dollar on Monday.
Viraj Patel, chief strategist at Vanda Research, told CNBC on Wednesday before the announcement that the next few weeks will be critical for investors assessing whether to return to the UK markets, but he hasn’t considered that yet.
“The pound six days ago was not a problem for me. I was looking at a bunch of other currencies as the most turbulent in the markets right now,” Patel said.
He added that the decline in the British currency and bonds represented a vote of no confidence in the government’s fiscal package, and concern about where sustainable growth would come from in an environment of rising and rising short-term interest rates.
“I think some of these doomsday fears are somewhat exaggerated to some extent, but I don’t think anyone wants to step in now and buy undervalued UK assets at this point,” he said.
“We could have a different conversation in three months because the pound is so cheap, but I think it’s just one of those things where the storm is before the calm.”
The UK stock market has also sold off in recent sessions, but not any deeper than other markets across Europe amid a broad global equities slump, as fears of more aggressive monetary tightening from central banks and slowing growth push investors to the sidelines. . .
Alan Costis, head of UK equities at Lazard Asset Management, told CNBC Thursday that the public sell-off as a result of the country’s economic turmoil “somehow presents some opportunities” for big UK companies with offshore profits that are benefiting from the falling pounds.
Stock analysts are watching gold bonds closely
UK long-term bonds – known as “golden bonds” – have seen historic levels of volatility in recent days, with prices rising since their initial crash on the back of the Bank of England’s announcement that it will buy two-week long-term bonds and delaying gold sales scheduled for next week until October 31.
Costis said equities analysts are closely watching volatility in the gold markets for indications of where interest rates are likely to head.
“The market is now discounting interest rates by going up to 6%. Before that situation last week, we were probably thinking that 3.75, maybe 3.5% would be the peak, and inflation would peak maybe in October or November of this year at around 11%. Now clearly, this has been taken out, because we don’t know where sterling is going to go, and how weak sterling inflation could be for the economy,” Costis said.
“Stability in the gold market is very important for these reasons, because it can give us an idea of where interest rates might eventually fall, and obviously that will have a huge impact on mortgage rates and consumer spending, so it all correlates, so yeah, We watch the gilded market as much as we watch the stock market.”
Common sense for Britain FTSE 100 Famous for its high dividend yields for investors, but as bond yields rise, the attractiveness of these types of stocks decreases, Custis acknowledged, but he explained that 45% of the profits paid by companies on the index are paid in dollars, and he isolates them to a certain extent.
This would also help explain why Britain’s average roof FTSE 250 The index was much tougher in light of the country’s economic chaos and currency collapse than its big-cap cousin.
“When we saw that with real estate companies during the first two days of this week, the (capitalization) rates in real estate stocks were four and a half percent — if you have interest rates at 6%, it’s very difficult for real estate stocks to look attractive.”
Central to the outlook for the near future, analysts have suggested, is Finance Minister Kwasi Kwarting to restore credibility, after taking the rare step of deleting forecasts from Britain’s Independent Office of Budget Responsibility ahead of Friday’s controversial announcements.
Kwarteng promised a more detailed and costly implementation plan on November 23, while the Bank of England meets on November 3 to assess the impact of financial announcements and determine the size of the next rate hike.
“I think we need to see the Office of Budget, the Bank of England and the chancellor come together and reinforce once again the fiscal prudence, the steps, and the goal of reducing debt-to-GDP numbers – albeit we are in a very strong position at the moment,” Costis said, adding that The release of a joint statement in November will be a positive sign for the markets.
Although some analysts have highlighted that the UK maintains strong financial fundamentals and support barriers for bonds and the currency, many are reluctant to come back again until the smoke clears.
Sima Shah, Senior Global Investment Analyst at Principal Global Investors, said investors are assessing whether the UK still maintains an attractive long-term investment destination alongside other advanced economies.
“While for the US, I think it’s a resounding yes over the next 10 years — stocks will be higher than they are today,” she told CNBC on Wednesday.
“For the UK, the bigger question will probably be how much higher are they going to be, and do we really believe in the UK going forward somewhere we want to put our money?”
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