Bank of England: Trussonomics could be costly for investors


The Old Lady is in a sticky spot. Inflation is at its 40-year high and an early 1990s-style recession is looming. The UK has a tight labor market, like the US, and an energy shock, like the eurozone. Finding an escape route could be further complicated by the unorthodox economic policies of Liz Truss, the likely candidate to become the next prime minister.

Tax cuts are becoming a key feature of the Truss premiership. That, as her rival Rishi Sunak argues, is likely to fuel inflation and put upward pressure on interest rates. Nigel Lawson, chancellor in the Thatcher government, draws parallels with the growth budget of 1972, which was followed by years of high inflation.

At that time, gold performed better. Its value has almost doubled in real terms. Commodities such as oil and wheat also performed well. The dismal performance of equities showed that they were a weak hedge against inflation.

Analysis of markets dating back to 1900 tells a similar story. During periods of high inflation, the real return of stocks was -10 percent, according to a Credit Suisse study. Bonds meanwhile yielded a negative return of 24.7 percent. Separately, the study showed that investors in British equities would have been better off staying in cash during periods of rising interest rates, yielding 0.6 percent more per year.

However, some sectors could do well. While banks can be hit by bad loans when the recession hits, higher interest rates are thickening their net interest margins. Truss is an opponent of windfall gains, making it unlikely that she would copy the one-off 1981 bank levy imposed by her role model Margaret Thatcher.

Truss is clearly pro-business. Its policy of abolishing corporate tax hikes would benefit investors in companies that are doing well. But protecting corporate profits would be an unpopular policy if voters want help paying utility bills. With the economy slipping into recession, she may find it difficult to stick to her policies. No plan survives contact with reality intact.

The Lex team would like to hear more from readers. Please tell us what you think the economic impact of a Liz Truss premiership would be in the comments section below.