5th Sep 2022 15:40
(Alliance News) - Liz Truss on Monday was announced as the winner of the UK Conservative Party election, handing her the keys to 10 Downing Street, though her victory was met with something of a collective shrug by financial markets.
Stocks which have been hit by inflationary pressures slid further, as investors digested what Truss's low-tax vision could do to already rampant consumer prices. Housebuilders struggled, but conversely, BAE Systems PLC extended gains amid possible defence spending plans.
Truss promised a "bold plan" to cut taxes, deal with the energy crisis and deliver a Tory victory in 2024 as she prepares to take office as the UK's next prime minister.
She defeated rival Rishi Sunak by 81,326 votes to 60,399 to win the Tory leadership, and will replace Boris Johnson in Number 10 on Tuesday.
"Liz Truss campaigned on a programme of free markets and low taxes to boost long-run economic growth. But she inherits the helm of the UK government in difficult times. The UK economy is likely already in a recession that we expect to last until spring 2023. Inflation has reached double digits and is set to increase further in the coming quarters," Berenberg analyst Salomon Fiedler commented.
"In the near-term, the room for tax cuts may be limited, as she is under political pressure to set up support programmes to help people with their exorbitant energy bills, raising government spending, and lowering taxes without reducing spending would raise the deficit further, exacerbating inflation pressures."
Looking at equity market reaction, defence firm BAE was among the standout performers, rising 3.0%. By 2030, Truss plans to spend 3% of UK national income on defence, compared to around 2% currently.
Stocks beaten down by inflation continued to struggle, however.
Hargreaves Lansdown analyst Susannah Streeter commented: "Despite expectations of a cut to VAT to help struggling firms, the bleak outlook for the UK economy has kept the hospitality sector in the red. As well as fears consumers will be strapped for cash in the months to come, soaring gas prices add more pain for companies, who are waiting in limbo for a package of support to be unveiled."
Pub and bar owner Mitchells & Butlers PLC was down 1.4%, while Restaurant Group PLC, the owner of Wagamama, lost 3.1%.
Housebuilders also struggled. The UK housing market has shown resilience in recent months given higher interest rates and a squeeze on household incomes.
However, after slashing UK interest rates to a record low of 0.10% during the pandemic, the Bank of England has ratcheted rates back up in recent months to deal with soaring inflation. After a bumper 50 basis point hike in August, Bank Rate now stands at 1.75%.
Rising interest rates have led to fears of a housing market cooldown. Truss's economic strategy may exacerbate inflationary pressures, strengthening the case for the BoE to turn to more rate hikes.
UK property portal Rightmove PLC was among the worst blue-chip performers, down 2.3%.
By Eric Cunha; [email protected]
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