Beyond Bulls & Bears

Fixed Income

Liz Truss to be new British prime minister

David Zahn, Franklin Templeton’s Head of European Fixed Income, offers some initial thoughts on the market implications of the election of new UK Prime Minister Liz Truss. 


Hello. This is David Zahn with your European fixed income update.

So, we have a new Prime Minister in the UK. Liz Truss has beat Rishi Sunak to take over from Boris Johnson. She won 57% of the vote, which isn’t probably as high as many people were thinking.

And also remember, she came second in MP [member of parliament] votes behind Rishi before this, last to going to the ballot box.

I think she does have a lot of work to do to try to bring the Conservative Party back together.

She is seen as a decisive leader. She’s not afraid to ruffle feathers. It will be interesting to see how that gets dealt with. But also there are many that will say, “well, she does flip-flop a lot and if something isn’t quite working, then she changes tack,” which isn’t always bad depending on how that is done. Now, she does have a very full inbox.

In addition to this, she has to deal with high inflation, which is running at mid-teens, which is creating a cost-of-living crisis across the country. Also, you have the energy crisis, which is obviously contributing to that.

She’s already putting together legislation of how do we try to deal with that, which will be interesting to see. Lastly, the UK is heading into recession, so how does she basically get the UK economy moving again and deal with some of those Brexit issues that are left over?

We also have Ukraine. I assume she’ll continue to support Ukraine. She’s always been very vocal supporter of that. So that means more money and weapons going to Ukraine as they continue to fight their war. And lastly, she has the NHS [National Health Service]. She has to figure out how to change that, how to reinvigorate that, because a lot of, most, surveys are showing that people in the UK no longer think it’s actually that great.

I think these are all issues that voters will care about in two years. So, she has two years to try to address these things. It’s going to be very difficult. This is going to lead to a lot of budget deficits, big deficit spending. I’m not anticipating the gilt market will particularly like this, especially after the deficit spending over the last several years.

She also wants to cut taxes. I think the markets will be really focused on her mini-budget coming out in probably next month or so, of how is she plans to pay for all the spending that she’s doing. But I think if she can reinvigorate the UK economy and really get some of the bureaucracy down, she has a chance to bring people together and bring the Conservative Party back together and maybe get the UK moving again.

But I think financial markets will really be waiting to see the detail. Gilts, probably higher in yields for now. Sterling will be reacting to every policy movement, positive or negative.

And so, I think we’re in for quite a volatile time in financial markets in the UK over the next couple of months.


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