New Prime Minister, new impetus for UK equities?

After winning a titanic battle with Chancellor Rishi Sunak, Liz Truss has now been appointed Prime Minister. The MP for South West Norfolk clinched 57% of votes from Conservative party members in the battle that has raged since Boris Johnson was forced to resign. But what does this mean for stock markets and investors?

Who is Liz Truss?

Having started her career as an economist and accountant, Liz Truss became an MP back in 2010, and entered government two years later.

Over the past decade she has been Education Minister, Secretary of State for the Environment, Justice Secretary, Chief Secretary to the Treasury, and Secretary of State for International Trade and President of the Board of Trade, as well as Minister for Women and Equalities. 

She is known to be an enthusiastic user of social media, with 371,000 followers on Twitter and more than 73,000 on Instagram.

Tough times ahead

In a tweet marking her victory, Truss acknowledged the country had problems to tackle, with inflation and energy prices having soared over the course of this year. “I will take bold action to get all of us through these tough times, grow our economy, and unleash the United Kingdom’s potential,” she pledged.

Standing outside Number 10 Downing Street in her first address, Truss insisted she had a “bold plan” to grow the economy through tax cuts and reform. “I will cut taxes to reward hard work and boost business-led growth and investment,” she said. “I will drive reform in my mission to get the United Kingdom working, building, and growing.”

In addition, she pledged to deal “hands-on” with the energy crisis. “I will take action this week to deal with energy bills and to secure our future energy supply,” she added.

A challenging time

Truss certainly arrives at Number 10 with a long list of challenges to face. Top of the list is the ongoing cost of living crisis threatening families across the country. Everyone is waiting to see how she’ll tackle the problems and what will be her main priorities, according to Steven Cameron, Aegon’s pensions director.

“The nation awaits news on how the Government will offer future support to consumers and businesses as the cost of fuel continues to skyrocket leading to some predicting inflation reaching 18% or more early next year,” he said.

What does it mean for investors?

Chris Bowie, manager of the TwentyFour Corporate Bond fund, told us it was hard to say what Liz Truss clinching the top club would mean for investors. “We’ll need to see what the emergency budget brings,” he said.

However, he does see potential opportunities. “It would be a positive for the pound and the UK economy if she can guide the UK to more domestically focussed energy sources, given we have the potential to be far more energy independent than Europe,” he added.

Potential beneficiaries

Individual companies may also benefit from policy changes, according to Jacob de Tusch-Lec, who has managed Artemis’ global income strategies since July 2010. He cited the example of BAE Systems and pointed out that it derives three-quarters of its revenues in the US, UK and Europe, where defence spending is expected to rise significantly.

“Liz Truss has indicated that the UK government will increase defence spending from 2% to 3% of GDP annually by 2030,” he said. “This would represent a significant potential tailwind for BAE’s sales.”

Concerns

According to Ed Smith, chief investment officer at Rathbones, Truss built up a commanding lead over Sunak by “espousing a low tax, small state” policy agenda. “She locked herself into commitments to tax cuts, while rejecting “handouts” as the way to help people weather the cost-of-living crisis,” he said.

However, he believes reality is now closing in. “The last few days have seen Ms Truss swerving away from some of her early campaign pledges – at least her seeming resistance to big government-funded support to help households and businesses cope with their energy bills,” he explained.

Funds with UK exposure

The fact is that the coming months are currently shrouded in uncertainty, and no-one knows for sure how stock markets will react. The initial moves, however, have been encouraging. The blue-chip FTSE 100, for example, rose from 7,231.49 at noon on Monday 5 September to 7,323.9 by the following morning.

So, which UK funds could be worth considering?

When it comes to UK equities, Jupiter UK Alpha is worth a look. The portfolio currently contains 32 holdings, and the largest holdings include some very prominent UK-based businesses, even though many of them have truly international business operations. For example, there’s pharmaceutical giant AstraZeneca, global energy businesses Shell and BP, and the mining operations of Glencore and Rio Tinto*.

Schroder Recovery fund, which is on the Chelsea Selection is another option. The portfolio focuses on UK companies that have suffered a severe setback in either share price or profitability, and also has exposure to many household names. The largest holding at 2.9% is in transport business Firstgroup, whose interests are in the UK and North America*. Barclays, M&G and Standard Chartered are all tied on second spot with 2.7% of assets each, followed by 2.6% positions in both NatWest Group and Go-Ahead Group*.

Of course, it can be argued that smaller companies’ funds will often have greater exposure to more domestically focused businesses. An option here is Liontrust UK Smaller Companies fund, which aims to identify companies with durable competitive advantages that enables them to sustain higher-than-average profitability. Currently, 77.4% of the portfolio is invested in companies listed on the FTSE AIM Index*. These include Judges Scientific, which is a group that specialises in the acquisition and development of scientific instrument businesses*.

*Source: fund factsheet, 31 July 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice. Any reference to specific securities is for illustration only and is not a recommendation to buy or sell.