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The pound, bonds and energy: the winners and losers under British PM Truss

·4-min read

LONDON (Reuters) - Liz Truss becomes Britain's new prime minister on Tuesday, facing inflation at 40-year highs, the biggest squeeze on household living standards in decades and a looming recession.

The newly elected Conservative Party leader has pledged to slash taxes to kick-start growth and is expected on Thursday to unveil her plan for the energy crisis. Further policy announcements are likely in the weeks ahead.

Here's a look at some of the assets that could emerge as winners and losers under a Truss premiership.

STERLING STUCK

Britain's battered pound may be the short-term winner but a longer-run loser.

The currency on Monday fell to its weakest since March 2020 at $1.1444, before rebounding to $1.16 on Tuesday.

Sterling could benefit from a plan to freeze energy bills after months of policy paralysis, and from a fiscally looser government - especially if the Bank of England (BoE) hikes interest rates faster to prevent further price pressures.

But the pound has failed to get much love from the ramp-up in BoE rate hike expectations and sterling's fortunes are tied to global sentiment, which doesn't favour the UK.

Some analysts see the pound next year testing its all-time low of around $1.05 hit in 1985.

Graphic: Issue of Truss- https://fingfx.thomsonreuters.com/gfx/mkt/akpezbqdjvr/Pasted%20image%201662374011830.png

GILTS UNNERVED

British government bonds, or gilts, are in the loser's camp.

August was the worst month for 10-year gilts since 1986, with yields surging 94 basis points.

Graphics: August was an awful month for UK gilts- tps://fingfx.thomsonreuters.com/gfx/mkt/movanejlnpa/gilts0502.png

That was partly due to another gas price surge, but also expectations that a Truss government will increase fiscal spending.

The average household energy bill is set to jump 80% to 3,549 pounds ($4,105) annually from October, with further rises on the way. Reports that Truss is considering freezing energy bills could ease inflation fears, but they also imply more government borrowing.

Citi expects fiscal support in the coming weeks to include an additional 40 billion pounds in net fiscal easing this year, and just shy of 70 billion next year.

NatWest Markets expects 10-year gilt yields to hit 3% from around 2.96% now.

STRUGGLING SHARES

British stock markets look unlikely to rebound, although they are at the mercy of global sentiment as much as Truss' policy plans.

Hargreaves Langdon analyst Susannah Streeter worries that slashing taxes and spending big will mean higher rates for longer - bad news for stocks.

Higher bond yields could really hurt growth stocks, said Investec chief economist Philip Shaw, but he cautioned that making sector-specific conclusions was difficult without policy detail.

The energy and defensive-heavy FTSE 100 is down 1.4% in 2022, outperforming European shares that have lost 15%. The more domestically-focused, mid-cap FTSE 250 has shed 20%.

Graphic: FTSE- https://fingfx.thomsonreuters.com/gfx/mkt/klvykazzrvg/Pasted%20image%201662393103055.png

KEEP THE WINDFALL

Truss' plans for energy are yet to be made public but she has previously ruled out further windfall taxes to pay for support.

"Overall, that will be seen as a positive for the energy sector," said Streeter.

UK energy companies, buoyed by surging energy prices, have had a stellar 2022. The FTSE 350 oil and gas sub-index is up 40% year-to-date, set for its best year since 2016.

Streeter said targeted support could also benefit hospitality and retail, especially if Truss delivers pledges to cut value-added taxes and business rates. Streeter cited retailer Next as one beneficiary.

Graphic: Energy sector- https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrxaabvm/Pasted%20image%201662393746923.png

DEFENCE, INSURERS

Defence is a likely winner.

AJ Bell's head of investment analysis, Latish Khalaf, said Truss' plans to raise defence spending to 3% of GDP by 2030 should give defence shares "a little pump".

The FTSE 350 aerospace and defence sub-index has risen 10% this year, after Russia's invasion of Ukraine prompted calls for more security spending.

Insurers such as Aviva and Legal & General could also do well.

Truss has said she wants to reform so-called Solvency II rules, which could let insurers hold less capital against their investments in assets such as infrastructure.

Graphic: Defence stocks- https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwdllgvo/Defence%20stocks.png

(Reporting by Tommy Reggiori Wilkes, Dhara Ranasinghe and Samuel Indyk; Editing by Dhara Ranasinghe and Susan Fenton)