Peter Spiller, lead manager of Capital Gearing Trust (CGT), has warned of the increasing risk of a gilt market crisis to force the UK government to curb spending.
Labour’s recent failure to pass proposed cuts in personal independence benefit payments is a blow to the prime minister and chancellor’s plan to free up investment spending to kickstart economic growth, said Spiller in a joint article with Emma Moriarty, bond fund manager at his firm CG Asset Management (CGAM).
Writing in City AM, they say: “We have written about the risks of elevated government debt and unsustainable fiscal policies for some time. The UK’s public finances are widely acknowledged to be reaching this situation, alongside other developed markets such as the US, France and Japan. Our initial view was that the UK needed fiscal reform to avoid a debt crisis. After the events of the past weeks, our revised view is that the UK will not see fiscal reform until there is a crisis.”
The government’s repeated pledges not to increase taxes on working people indicate “we are close to the limit of the practical ability to extract more tax”, meaning cuts will have to made in public spending with social security reform the obvious place to start, Spiller and Moriarty argue.
They say the least painful solution to the UK’s problems is through generating growth but fear that proposals for a wealth tax will do the opposite, “disincentivising economic activity for an uncertain impact on revenues”.
The timing of a gilts crisis – and a replay of the October 2022 crash in government bonds during Liz Truss’ brief tenure as prime minister – is difficult to predict, Spiller and Moriarty admit, and depends on “how close we are to the breaking point of bond markets’ confidence”.
“Unlike the US or the euro area, the UK is a small open economy and does not have the exorbitant privilege of global reserve currency status, meaning that confidence in sterling markets may be quicker to evaporate, in a replay of the Truss moment,” they say.
Until then the managers are maintaining their defensive stance. “We are underweight risk assets as we remain concerned about stretched equity valuations in the US against a deteriorating macroeconomic outlook.
“Our multi-asset funds’ allocation emphasises dry powder and index-linked government bonds, to lower volatility and provide inflation protection.
“Until we see fiscal reform, our view is that portfolio positioning must incorporate the increasing possibility of a breakdown in the gilt market.”
Read our latest research report to see how this applies to CGAM’s flagship £830m Capital Gearing Trust. Other members on its investment team are Alastair Laing, Chris Clothier and Hassan Raza.
