By Charles White-Thomson, CEO at Saxo UK
It became clear in 2022 that the United Kingdom is effectively a publicly traded company or PLC with all the ups and downs this brings, with active and influential shareholders or to be more accurate, bondholders.
The opinions of these bondholders (or gilts) matter and their leverage can be applied via publicly traded financial instruments.
This clarity was delivered during the Truss / Kwarteng short-lived government and more precisely their mini-budget last September where the bond, equity, pension and currency markets began to collapse under selling pressure in face of huge negativity triggered by unfunded tax cuts and more widespread credibility concerns.
The message was simple – with public debt of £2.5tn, the actions of the United Kingdom matter, especially if you want to come back for more financing.
As lenders to the UK PLC, these bondholders arguably have different priorities compared to the general stakeholders. They are looking for relative stability, especially with currency and inflation, with smooth coupon payments and initial outlay. This is somewhat different compared to the broader stakeholders, including UK equity holders, who will also be looking at the smooth execution of the UK business plan with the ability to grow and outperform other geographical opportunities.
This nuance is important, especially if the C-suite becomes overly focused on stability and the status quo, or their bondholders, at the expense of growth and the general stakeholders.
For now, Chancellor Jeremy Hunt and Prime Minister Rishi Sunak, CFO and CEO respectively, have received many plaudits for the steadying influence they have delivered, and the broader financial markets have responded positively for the time being.
But looking ahead, it is difficult to build a sustained business case for UK PLC if the approach is purely stability and cost-cutting or raising taxes. This seems like a sure route to a managed decline.
The old adage when analysing publicly traded companies is that it is difficult to ‘cut your way to glory’, with the cut referring to reducing costs, and this applies here.
This brings us to the argument around the growth part of the Truss/Kwarteng mini-budget. The message around growth and reducing the tax burden became lost in the overall furor of the unfunded tax cuts, the debate around Trussonomics and the spectacularly poor delivery of the message.
For the UK to deliver on its full potential, it is important to maintain a balance between growth and stability. The growth strategy has to be clearly articulated with a focus on the drivers that deliver maximum returns including the bravery to review and if necessary, tackle ‘sacred cows’.
In the absence of this, the UK will be a good client of the bond market but will squander the most compelling part – the growth story and the vitally important associated upside.