Anthony Rayner, Fund Manager of Premier Miton Macro Thematic Multi Asset Team says they would argue that US Treasuries are a better ‘safe haven’ than gilts and the US dollar a better ‘safe haven’ than sterling, in part due to the instability in UK politics and of course the related economic and fiscal issues.
From a global perspective, for many years, the UK had been thought of as a relatively stable democracy.
The period was typically, but not always, characterised by a general election followed by a full electoral term, then the next general election. However, more recent years have been very different.
In fact, there will have been seven Prime Ministers in around a decade and three of those had large parliamentary majorities.
The UK is not the only Western economy to have changed in this way but the deterioration has been somewhat marked here.
There are some common dynamics which are driving this and many of them can be traced back to voter dissatisfaction. Voters of course care deeply about individual economic prosperity.
Indeed, real incomes have been stagnating for many years, some of which has been driven by the more recent cost of living crisis.
This sense of lack of economic hope has been compounded by public services deteriorating in many key areas.
This is driven in part by a lack of economic growth and, clearly for some, there is a feeling that this is compounded by the immigration hot potato.
On top of this, there is a sense that the government is not doing enough to rectify the situation.
Part of this is that government finances have been deteriorating for some time, due to some key episodes, including the Global Finance Crisis (GFC), which hit the UK disproportionately hard due to the economy being so financialised, the Brexit trade shock and the Covid lockdown (see below, source ONS).
The combination of a lack of growth (and therefore tax receipts), increasing debt levels and higher gilt yields combine to provide some dangerous fiscal dynamics.
Source: Office for National Statistics
In short, electorate patience has been wearing thin and voters are looking for more radical solutions.
After all, these dynamics have been in place for quite some time, so many voters want a clear break with the status quo.
This dissatisfaction has been further compounded by a lack of high quality leaders, though there is of course some subjectivity in this assessment.
Either way, traditional parties are getting a smaller and smaller share of the vote and leaders are getting shorter and shorter periods in which to govern.
Ironically, neither of these factors are contributing to solving problems that are driven by long term dynamics, such as demographic changes and deteriorating government debt.
We see this through the lens of our “new world perspective” of economic and political nationalism, with many of the old forces being replaced.
The last few decades, in most of the major economies, were dominated by globalisation, low levels of inflation and relatively contained government debt.
In contrast, more recent years have been characterised by deglobalisation, a higher for longer inflation environment and deteriorating government finances, which is being further challenged by demands for increased defence spending.
The political musical chairs aren’t helping UK credibility overseas, and this includes the relative attractiveness of UK assets.
From a portfolio construction perspective, we don’t by any means think of UK assets as always providing a ‘safe haven’, even if many multi asset investors still have a UK centric bias.
At the moment, we would argue that US Treasuries are a better ‘safe haven’ than gilts and the US dollar a better ‘safe haven’ than sterling, in part due to the instability in UK politics and of course the related economic and fiscal issues.
Thinking more generally, and beyond the UK, we don’t forecast per se but we can see that the relatively new structural forces outlined above have an important single economic and investment conclusion.
Specifically, we believe that global inflation will remain at uncomfortable levels for central banks and therefore rates will be higher for longer too.
This suggests a preference for real assets, like equities and commodities, and a bias to short duration in bonds.
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