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Has UK PLC become uninvestable?

Has UK PLC become uninvestable?
(Reuters/Toby Melville)

I am sure many of you would have heard the nursery rhyme "Solomon Grundy".

It details the significant events of the character over seven days of his life, with a major life event taking place on each day.

It comes to mind because, at the time of writing, it has been seven days since the UK’s "mini" Budget was announced by chancellor Kwasi Kwarteng.

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Since then, we have seen the UK economy spiral downwards as a wave of sweeping tax cuts to promote growth in the country’s spluttering economy have been met by concern from all quarters. This includes a stinging rebuke from the International Monetary Fund, which raised concerns the moves will increase inequality and counteract the Bank of England’s monetary policy.

Much like Solomon’s life, every day has been a new drama. We have had anarchy in the bond market; the pound slide to record lows versus the dollar; fears that house prices could fall as much as 15 per cent; predictions that interest rates could hit 6 per cent; fixed rate mortgages withdrawn at unprecedented speed; and the BoE stepping in to buy huge amounts of debt to shore up prices amid fears of insolvencies in pension funds. 

The only difference is, seven days later Solomon was dead and buried while this “attempt to promote growth” is still being pushed hard by the UK government.

How has this impacted the UK economy?

A lot of column inches have been dedicated to this fiasco, but I think the one that stood out to me was the comparison of the UK economy to an emerging market.

As Schroders senior European economist and strategist Azad Zangana points out, it is very rare – and incredibly negative – that we see interest rates coming up in markets and the currency falling at the same time, especially in a developed market. 

He says the uncertainty around the pound obviously puts off a lot of international investors. However, at the same time, the government has taken some significant steps to try to make the UK a more attractive place to invest, by cancelling the rise in corporation tax and by getting rid of the additional rate of income tax.

From an economic point of view the UK does not look good today – to say the fiscal stimulus has been poorly received by the market would be an understatement. That is not just the stock market, which has actually been quite resilient, but the bond and currency markets too. I was staggered by some of the substantial losses in the former, particularly long-dated gilts.

Value in UK equities

But I do feel those that worry the UK has become too much of a horror show to invest in are wide of the mark. We must remember the UK is still home to great companies, as well as huge amount of overseas and dollar earners.