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Outlook for 2023

The UK Gilt market has recovered substantially since the September mini-budget with the cost of borrowing falling by a third and Jeremy Hunts November budget has indeed helped to calm foreign investors and go some way to making the UK investable once again.


The Bank of England (BOE) have continued to talk about reducing their balance sheet and we have been discussing who will buy the UK Government Debt (aka Gilts) once the BOE starts selling them into the open market. The BOE currently owns more than a third of the UK Gilt market and is expected to be selling around £240bn of Gilts a year to unwind the £800bn Quantitative Easing scheme and correct a huge debt imbalance. Previous debt issuance to support the UK Governments expenditure have been hoovered up by the BOE but now they are to become the sellers, we question who will step in to buy this debt and at what price.

Foreign investors trading in UK debt normally account for over 30% of the annual Gilt issuance in the market, but in recent years it has been less than 15%, according to JP Morgan. In a new world where the UK has distanced itself from Europe, we are reminded of the former BOE Governor Mark Carney who commented that the UK Debt market was dependent on “the kindness of strangers” – reflecting on our reliance on foreign investors to provide liquidity to the UK Government and to help balance the books. Falling UK Gilts yields are good for the Government, as these represent the interest payments on the debt they need to pay to holders of the Gilts, however on a global scale it could be argued that Gilts yields should not fall too much further to remain attractive to foreign investors. You could say there is a bit of a chicken and egg scenario developing.

Narrative matters. Jeremy Hunt has managed to get the market to accept his borrowing plans as we can understand the reasons why it is needed and there is an acceptable, if painful, plan in place. The outlook for the economy is not great currently and if the chancellor can continue to bring the markets along in his story of doing his best in difficult circumstances, brought on by external factors, then he may still have a convincing narrative to encourage foreign investors back to the UK market.

China was in the news in December for the relaxation of their zero COVID policy. The prospect of home isolation, (remember those days), in China rather than mass quarantine in designated hotels along with dropping testing to attend public places must be a welcome relief and will hopefully help to calm some of the social unrest we have seen in the last few months.

We remain in a configuration we have not seen for decades: a slowdown in the world economy engineered by central banks to combat inflation. The intensity and duration of this central bank tightening phase depends of course on the speed of disinflation. The US Federal Reserve (Fed) Chairman Jerome Powell spoke after raising rates a further 0.5%, holding firm in his stance of managing market expectations of a much anticipated “pivot” from raising interest rates to starting to consider a cut. He warned investors that “it will take substantially more evidence to give confidence that inflation is on a sustained downward path”. At least we have now made a start with rate increases falling from 0.75% to 0.5%.

Historically there is a lag of five months between a peak in the rate of CPI inflation and the last Fed rate hike. In the autumn we started to see some tentative signs appearing that the labour market is softening, which should herald the deceleration in wages into 2023 which the Fed wants to see.

The “inflation peak” has probably been hit, which should allow a slower pace of rate hikes in 2023. The impact of 2022 will be felt for many years to come, with a seismic shift in monetary policy and, once more, war returning to Europe. The move from monetary support to one of tightening to tame inflation remains the financial story for 2023, as it has been throughout 2022.

We actually managed to have a staff Christmas lunch in December after several previous COVID cancellations. A Christmas gathering is as important here as it is at home, an opportunity to catch up with colleagues, review the year gone by, but most importantly to prepare for the one ahead. During our lunch we once again remembered Queen Elizabeth II and it seems apt to finish 2022 in her memory. Speaking during the initial onset of COVID in 2020, she said “When life seems hard, the courageous do not lie down and accept defeat; instead, they are more determined to struggle for a better future.” Investment markets have not been kind in 2022, however, we prepare for 2023 with steadfast confidence in better times ahead and we look forward to sharing those with you, our trusted clients.

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Please note the value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. Errors and omissions excepted.

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