Investors should look to reduce risk with a broadly diversified mix of assets

Prime Minister Liz Truss and the Chancellor met the Office for Budget Responsibility to discuss the economic and fiscal outlook in the light of recent market turmoil.

Commenting on the deteriorating UK growth outlook, RLAM’s Head of Multi Asset Trevor Greetham said:

“The pound has recovered some ground on higher interest rate expectations, but gilt market sentiment remains fragile and the outlook for the UK economy has deteriorated in the week since the government announced its Growth Plan.

“Tax cuts when inflation is at a multi-decade high will force the Bank of England to raise rates more aggressively than otherwise, increasing recession risks through the knock on impact on mortgage rates and the housing market. Meanwhile, the government is determined to press ahead with tax cuts and looks set to embark on a new round of austerity to balance the books. Real terms public spending cuts are likely to have a negative impact, with promised supply side measures unlikely to provide an offset in the short term to medium term.

“Pressure to change course is likely to persist and, with it, heightened volatility in domestic markets. Investors should look to reduce risk with a broadly diversified mix of assets. Foreign currency exposure through equities or commodities provides a hedge against further sterling weakness. Gilts have been on a rollercoaster in recent days, but higher yields mean better prospective returns for investors, especially with inflation likely to peak as the economy slows.”