Old Mutual Investment Group

Macro Perspectives 42 | Chaos in the UK bond market

October 18, 2022
Old Mutual Investment Group
Macro Perspectives 42 | Chaos in the UK bond market
Show Notes Transcript Chapter Markers

Portfolio Manager, Peter Brooke, offers his latest Macro Perspectives, this week looking at the chaos in the UK bond market following the Liz Truss administration’s disastrous tax cut proposals, and how our own local bond market currently stacks up.

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Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 42 of 2022, and I want to talk about the chaos in the UK bond market. 

Peter Brooke  00:11

Under Prime Minister Liz Truss' growth drive, UK Gilts fell 10% in a week and more than 30% in a year. To put this in perspective, during Nenegate, the South African bond market dropped by 11% in the week, but only fell 20% from its highs. So, this has actually cost UK pensions more than Nenegate cost us. And in exactly the same way, the global bond market revealed its true power and forced political change. Liz Truss was forced to sacrifice a Chancellor of Exchequer, Kwasi Kwarteng, after 38 days. In South Africa, we were even faster, with our own Des van Rooyen, the weekend special, forced out after just four days. During this dark period, South Africa went through seven finance ministers in seven years. Although to be fair, both Pravin Gordhan and Nhlanhla Nene served twice as we tried to bring some stability back into the system. 

Under the Tory government's revolving door policy at 11 Downing Street, there have been five chancellors in three years. As we have learned through better experience, it takes a long time to recover the trust of global capital. And we still pay a hefty premium to borrow money. I suspect the British people will find they have to adjust to a higher cost of capital over time. This in turn will put pressure on their property market as mortgage loan agreements continually come up for renewal, taking money out of consumer pockets and reducing growth. 

Peter Brooke  01:39

While bad news for the Brits, it is an important lesson for governments and politicians around the world, including our own. No one has a blank check from the bond market on policy. To be fair, though, the UK sell off is part of a larger bond market sell off. I updated my valuation spreadsheet yesterday, and the change in expected returns from bonds is remarkable. And we are now seeing some of the best returns for a decade. Obviously, inflation is much higher, but it will fall from here, which will steadily improve the real returns. 

Peter Brooke  02:17

Our own bond market, while performing much better than the rest of the world has also sold off and now gives a return of six and a half percent in real terms, which is exceptional. The funds I manage are high growth, high equity funds. But despite this, I have the highest level of offshore bonds and the highest level of total bonds since the fund started. We don't actually - we didn't own any UK bonds, and we still don't. But this market disruption has created opportunity elsewhere, which we've taken advantage of. 

I hope you enjoyed this perspective. I won't be doing a podcast next week as Siboniso Nxumalo will be doing one on his quarterly update but catch you after that. Thanks. 

The chaos in the UK bond market and putting it in perspective through the lens of our own Nenegate
Bad news for the Brits – but an important lesson for governments and politicians around the world
The performance of the bond market in South Africa