“Unloved, Undervalued” UK Stocks Are Back In The Spotlight On The Hopes Of Rishi Sunak For Stability

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Last Updated on October 25, 2022 by Bitfinsider

As Rishi Sunak becomes the third Prime Minister of the United Kingdom in as many months, some analysts are re-evaluating their outlook for British stocks. However, the majority of analysts continue to maintain a cautious stance in light of the numerous economic headwinds.

The realization that Sunak would succeed Liz Truss gave markets an initial boost on Monday. This came after the withdrawal of controversial former leader Boris Johnson and Penny Mordaunt from a potential leadership contest.

The former finance minister was seen as a stabilizing force after the economic chaos unleashed by the 44-day tenure of Truss, but the initial relief rally proved to be fragile, and by the afternoon deals on Tuesday, Britain’s FTSE 100 was down 0.7%.

However, despite the convergence of macroeconomic, political, and market crises that were waiting in Sunak’s inbox at 10 Downing Street upon his arrival, some analysts are already unwinding their pessimistic forecast for U.K. stocks.

“The fact that Rishi Sunak is serving as Prime Minister is most certainly a calming influence on the markets. This was demonstrated for us yesterday by a drop of 37 basis points in the price of 2-year gilts. “The fact that there is some stability on that side is something that we view as positive news,” Charles-Henry Monchau, chief investment officer at Bank Syz, told CNBC on Tuesday. “We see this as good news.”

“We also believe that he might be able to bring this fiscal stability which is very needed in the United Kingdom, and it might surprise you that we recently upgraded U.K. equities to neutral because we were negative on this market before. “We also believe that he might be able to bring this fiscal stability which is very needed in the United Kingdom. We think that it is underowned, that it is unloved, that it is undervalued, and that there is some potential for growth from here.

In spite of the fact that many market participants acknowledged the widespread sigh of relief experienced by the market, others exhibited a moderate degree of hesitancy over the medium term because of the country’s myriad of problems.

“This outcome is the most market friendly one that was possible in the short term because there will be no need to play dice with Tory party members again, and the new Prime Minister will be able to enter number 10 as quickly as possible. According to James Athey, the investment director at Abrdn, “that’s probably already in the price now.”

“However, the economic future is still uncertain; inflation is still way too high, and the Bank of England has not yet really grasped the nettle,” As a consequence of this, the future is not at all favorable for investors in the UK.

In his inaugural speech on Tuesday in front of Downing Street, Sunak emphasized the significance of “economic stability and confidence” while also issuing a warning about “difficult decisions to come.”

In contrast to the controversial tax-cutting plans laid out in Truss’ “mini-budget” against the backdrop of double-digit inflation, it is expected that he will support the current Finance Minister Jeremy Hunt’s planned return to tightening the fiscal belt.

Following subsequent movements in long-dated United Kingdom government bonds, also known as gilts, the Bank of England was forced to launch an emergency bond buying program lasting for two weeks in order to prevent the imminent collapse of pension funds.

Officials from the central bank also mentioned the necessity of further “significant” increases to interest rates in order to combat the inflationary impact that was caused by Truss’s fiscal spending.

The Bank of England has announced that it will begin the delayed sales of gilts at the end of this month and has officially brought an end to the purchase program. As far as the markets in the United Kingdom are concerned, the assumption that the country’s central bank will now be less aggressive in increasing interest rates is the most important part of the potential stability narrative.

“I do think with the new prime minister coming on, with the new chancellor coming on as well,” UBS CEO Ralph Hamers said in an interview with Bitfinsider on Tuesday. “I think the market is always looking for consistency there,” Hamers added. “The markets see there is going to be more predictability and more consistency between fiscal policy and central bank policy,” Hamers said.

According to Paul Hollingsworth, the chief European economist at BNP Paribas, the shift in policy toward a more traditional fiscal stance was “good news overall” because it eliminated the “uncertainty risk premium,” which had been an additional headwind to the outlook.

It is also possible that this helps restore the credibility of the institutions in the United Kingdom. It will no longer be the case that monetary policy and fiscal policy are operating in opposition to one another, as Hollingsworth explained.

“During the summer leadership campaign, Sunak was a very vocal opponent of the suggestion of revisiting the BoE’s independence. When it comes to the openness of financial decisions, Sunak will most likely support the role played by the Office of Budget Responsibility (OBR).

However, in the context of a bleak fiscal picture, the “difficult decisions” to which Sunak referred will make it difficult to claw back the electoral damage inflicted by Truss and Johnson’s prior premierships. With the Conservative Party polling at historic lows and a general election scheduled for 2024, this will make it difficult for the Conservative Party to win back voters who were turned off by Truss and Johnson’s earlier premierships.

According to Hollingsworth, “Admittedly, in the short term, it most likely means that the BoE will deliver less policy tightening” (we expect 75bp next week rather than our expectation of 100bp immediately after the mini-Budget).

It’s possible that this will assist Sunak in presenting the view that he’s prevented a steeper rise in mortgage rates. However, in the medium term, spending cuts against the backdrop of already strained public services will be challenging from an electoral standpoint.

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