The UK has firmly had the spotlight turned on to it over the past few weeks since the new Prime Minister, Liz Truss, entered 10 Downing Street.

From day 1, the message presented by the newly formed government, was that growth was top of the agenda as the economy moved towards a sharp slowdown due to rising prices and a cost-of-living crisis.

This change of rhetoric was fully confirmed on Friday after the new Chancellor, Kwasi Kwarteng, presented the ‘mini budget’. The tax cuts and fiscal spending measures introduced emphasise the governments focus on growth first and foremost. The planned tax cuts due to occur next year, will provide the UK consumer and businesses much needed relief from rising costs. The measures implemented may be added to over time and the estimated cost of over 12% of UK GDP may well have to increase further. The government are hoping the UK will reach 2.5% growth from the recent changes and have stated that they will do more to drive growth in the UK to reach this level.

The measures implemented to stimulate growth have put serious pressure on the Bank of England Monetary Policy Committee (MPC). The independent central bank of the UK has its own remit of controlling inflation. As inflation has continued to push higher due to rising prices from energy, food and goods, they have been implementing interest rate rises to try and get inflation back under control. On Thursday last week, a day before the ‘mini budget’, the Bank of England raised underlying interest rates by another 50 basis points. This was less than some market participants had been expecting but commentators were unsure whether the MPC wanted to see what measures the new Chancellor would be implementing before committing to raising interest rates too much. With the energy price caps being introduced and commodity input prices not being as high, the MPC may be hoping interest rate increases could be limited, as these factors could provide further reductions to inflation.

The Bank of England are in the unenviable position of raising rates in a slowing economy and so do not want to seem to be doing more than required, as higher interest rates impact growth. The supply and commodity driven inflation the global economy is currently experiencing is hard to control by raising rates therefore any fall in inflation from other sources is a major boost to all central banks.

With the UK government being extremely pro-growth and the Bank of England trying to slow demand, there is a tug of war underway in the UK. The policies are polar opposites.

This has led to extreme volatility in markets. UK Gilt yields have risen sharply as the government has confirmed that debt will be used to fund all of the increased fiscal spending being applied to the economy. The pound has been put under pressure too. Market participants now believe that as the government is implementing such large spending measures, the Bank of England will have to come in and provide further interest rate hikes to control the exchange rate. A falling pound provides headwinds for inflation, so they will want to be seen to at least be doing what they can and not lose all creditability in the market.

The investment team here at MAIA believe the volatility and sharp moves in the pound and debt markets will continue in the short term. These moves will also impact equity markets, which tend to anticipate the changing economic landscape. We continue to focus on the longer term and invest with a multi asset approach. We do not invest 100% in the UK and some asset classes in our portfolios could benefit from the volatility in markets. These include our investments in infrastructure, gold and equities.

We continue to be underweight to fixed income assets, particularly within government debt globally. We have believed for some time that government debt yields would have to rise as interest rates are increased. We are still positive on shorter duration corporate debt and think the implementation of more fiscal measures should help corporate debt more than government debt, as businesses will have less risk from a slowdown impacting growth over time.

Infrastructure is another key investment within our portfolios. This is supported by increased fiscal spending not just in the UK but globally. Energy independence is high on all country’s agendas, as is the focus on climate change, business investment and construction projects. These should all positively impact our infrastructure holdings within the portfolios. Our gold holding should also benefit from the current volatility, as a safe haven asset.

Our overseas equity holdings may also benefit from the weakness in the pound. We continue to hedge some assets and keep some unhedged as we want to reduce currency risk in the portfolios. Our unhedged equities, especially in the US, should be positively impacted by the fall in the sterling exchange rate, as should our exposure to the FTSE 100. The large cap global nature of the index means that 80% of earnings from these businesses are made overseas and so these companies should be positively impacted from the fall in Sterling.

In conclusion, the tug of war between the Bank of England and the UK government will provide short term volatility and headline grabbing news for markets to manoeuvre. Further measures may be undertaken by both parties which will cloud the picture further.

We believe that the current portfolio positioning for the longer term is still positive to provide the best opportunities for investors over time. We continue to be diversified across asset classes and geographies. Being overweight to alternative assets should help to limit the volatility. Managing exposures to assets and currencies will also help to reduce risks in the shorter term.

As has been the case for the year so far, the road ahead is extremely bumpy and there are a lot of macro factors to take into account, but we believe the portfolios are positioned well to manoeuvre what is to come over the coming months and years.