Is the UK buying now? Analysts weigh in after market crash

UK bond markets and pound This week went into free fall as investors shrugged off the new government’s fiscal policy announcements and some analysts believed opportunities were emerging.

The Bank of England it was wednesday had to intervene in the bond market with a temporary purchase program such as the surrender of long-term gilt prices threatened pension funds Mortgage loans that the central bank considers a significant risk for financial stability.

UK bond yields are heading for their sharpest monthly decline since at least 1957, while sterling fell to an all-time low against the dollar on Monday.

Viraj Patel, chief strategist at Vanda Research, told CNBC on Wednesday that the next few weeks will be critical for investors weighing a return to U.K. markets, but he wouldn’t count on it just yet.

“The pound was not an issue for me six days ago. I was looking at a number of other currencies as more dislocations in the markets at the moment,” Patel said.

He added that the depreciation of the currency and British bonds raises concerns about where sustainable growth will come from in an environment of low confidence in the government’s fiscal package and high and rising short-term interest rates.

“I think some of these doomsday fears are overblown to some extent, but I don’t think anyone wants to step in and buy UK assets that are undervalued at this point,” he said.

“We may have a different conversation in three months because the pound is pretty cheap, but I think it’s one of those things where there’s a storm before the calm.”

The UK stock market has also fallen in recent sessions amid a broad global pullback for stocks, as fears of more aggressive central bank monetary tightening and slower growth have forced investors on the sidelines. .

Alan Custis, head of U.K. equities at Lazard Asset Management, told CNBC on Thursday that the country’s economic turmoil “creates some opportunities” for British blue chips with overseas earnings benefiting from lower overall sales. pound.

Stock market analysts follow gold closely

Long-term British bonds, known as “golds,” have seen historic levels of volatility in recent days after initial prices fell amid the Bank of England’s announcement that it would buy long-term bonds for two weeks. postpone next week’s scheduled gold sales until October. 31.

Custis said stock analysts are closely watching volatility in the gilts markets for signs of where interest rates will go.

“The market is now driving interest rates down to 6%. Before this last week, we were probably thinking 3.75, maybe 3.5% peak, inflation would peak, around 11% in October or November of this year. Now it’s clear that , it was thrown out because we don’t know where sterling is going to go, how much inflation a weak sterling could cause for the economy,” Custis said.

“Stability in the gilt market is very important for these reasons, because it can give us a sense of where interest rates may eventually fall, and obviously that will have a big impact on mortgage rates and consumer spending. Yes, we watch the gilt market as we watch the stock market. We are also watching.”

British blue chip FTSE 100 is known for its high dividend yields for investors, but as bond yields rise, the appeal of that type of stock is waning, Custis acknowledged, but he pointed out that 45% of dividends paid out by companies in the index are paid in dollars. it insulates it to some extent.

It would also help explain why Britain is middle class FTSE 250 The index has outperformed its large-cap cousin amid the country’s economic chaos and currency collapse.

“Looking at the first few days of this week with real estate companies, (capitalization) rates in real estate stocks are four and a half percent – if you have 6% interest rates, it’s hard to make a lot of real estate stocks look attractive.”

After Finance Minister Kwasi Kwarteng took the rare step of throwing out forecasts from Britain’s independent Office for Budget Responsibility ahead of Friday’s controversial announcements, the key outlook for the near term is Kwasi Kwarteng’s regained credibility, analysts say.

Kwarteng promised a more detailed and cost-effective implementation plan in November. The Bank of England is meeting on November 23. 3 to assess the impact of fiscal announcements and determine the magnitude of its next rate hike.

“I think we need to get the OBR, the Bank of England and the Chancellor together and re-invigorate the goal of fiscal prudence, tram lines, debt-to-GDP reduction – although we’re in a pretty strong position at the moment,” Custis said in a joint statement in November. added that it will be a positive signal for

While some analysts point to the UK maintaining strong fiscal fundamentals and support barriers for bonds and the currency, many are reluctant to back down until the smoke clears.

Seema Shah, chief global investment strategist at Principal Global Investors, said investors appreciate that the UK remains an attractive long-term investment destination alongside other advanced economies.

“And for the U.S., I think over the next 10 years it’s a big yes — stocks will be higher than they are today,” he told CNBC on Wednesday.

“For the UK, it’s probably a bigger question of how high they’re going to be, and where we want to put our money, do we really believe that the UK is going to move forward?”