Is the UK Buying Now? Analysts weigh after a market crash.

Security guards stand outside the London Stock Exchange building on December 29, 2020.

Tolga Akmen | AFP via Getty Images

The UK bond market and the pound freefall this week as investors hesitate to announce the new government’s fiscal policy, and some analysts believe an opportunity is emerging.

On Wednesday, the Bank of England was forced to intervene in the bond market with a temporary buyout program as the capitulation of long-term gold prices threatened pension funds and mortgage loans and the central bank considered it a significant risk to financial stability.

British bond yields are seeing their sharpest monthly gains since at least 1957, with the pound dropping to an all-time low against the dollar on Monday.

Prior to the announcement, Viraj Patel, chief strategist at Vanda Research, told CNBC on Wednesday that the next few weeks will be important for investors to evaluate whether they will return to the UK market, but they will not consider it yet.

“Six days ago the pound was not a problem for me,” Patel said. “I was looking at other currencies as being more volatile in the current market.”

He added that the decline in currency and UK bonds means a vote of no confidence in the government’s fiscal package and concerns about where sustainable growth will come from in an environment of high and rising short-term interest rates.

“I think the horrors of the apocalypse are being exaggerated to some extent, but I don’t think anyone wants to step in and buy undervalued British assets right now,” he said.

“We can have another conversation in three months because the pound is so cheap, but I think that’s just one of those things that storms before it calms down.”

The UK stock market has been selling off in recent sessions. It’s not as bad as other markets across Europe as more aggressive monetary policy tightening by central banks and fears of slowing growth are turning investors away. .

Alan Custis, head of UK equity at Lazard Asset Management, told CNBC on Thursday that the general sale as a result of the country’s economic turmoil “throws an opportunity” for UK bluechips with overseas earnings that benefit from the decline. pound.

Stock Analyst Watching Gold Closely

UK long-term bonds, known as “gilts,” have seen historical levels of volatility in recent days. Available on Friday and Saturday until October 31st.

Custis said equity analysts are keeping a close eye on volatility in the gold market for an indication of where interest rates will go.

“The market is now discounting interest rates to 6%. Before this last week, I thought maybe 3.75, maybe 3.5%, would be a peak, and inflation will peak at around 11% in October or November of this year. I thought, now obviously, it’s been abandoned because we don’t know where the pound is going or how inflationary it will be to the economy,” Custis said.

“The stability of the gold and gold market is very important for this reason, because it can give us some sense of how far interest rates can ultimately reach and obviously have a huge impact on mortgage rates and consumer spending, so they are all linked. Because there is. So yes, we look at the gold market as much as we look at the stock market.”

The UK’s high-quality FTSE 100 is known to investors for its high dividend yields, but Custis admits that the attractiveness of these types of stocks has diminished as bond yields soared. It is somewhat insulated.

This will also help explain why the UK midcap FTSE 250 index has suffered more than the large caps in light of the UK economic turmoil and currency collapse.

“In the first few days of this week, the (capitalized) interest rate for real estate stocks is 4.5% when viewed from real estate companies, and if the interest rate is 6%, it’s very difficult in real life. Real estate stocks will look attractive.”

Analysts have suggested that the key to the outlook for the foreseeable future is to restore confidence after Finance Minister Kwasi Quarteng took the rare step of omitting projections from the UK’s independent budget office ahead of Friday’s controversial announcement.

Kwarteng promised a more detailed and costly action plan on 23 November, while the Bank of England meets on 3 November to assess the impact of the financial announcement and determine the size of the next rate hike.

“We believe that OBR, the Bank of England and the UK Prime Minister should come together to once again strengthen the targets for fiscal soundness, tramlines and debt-to-GDP reduction. Moment,” Custis said, while the November joint statement was a positive signal for markets. added that there will be

While some analysts have stressed that the UK maintains strong fiscal fundamentals and supports barriers to bonds and currencies, many are reluctant to jump back until the smoke is gone.

Seema Shah, chief global investment strategist at Principal Global Investors, said investors are assessing whether the UK, along with other developed countries, is still an attractive long-term investment destination.

“In the US, I think stocks will be higher than they are today over the next decade,” she told CNBC on Wednesday.

“In the case of the UK, how much higher it will go would be a bigger question. And do we really believe that the UK will move forward where we want to invest our money?”

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