How Will U.K.’s New PM Rishi Sunak Help The Stock Market?

Key Takeaways

• The citizens of the United Kingdom are hoping for a leader that will bring stability and unity after the country has struggled to find and elect competent leaders.
• Rishi Sunak took over as PM of Britain after Liz Truss had only a 44-day tenure, which involved a controversial tax cut that plummeted the value of the British pound.
• Inflation in the U.K. hit a 40-year high of 10.1% last month, and many households are feeling the pressure of soaring prices as the economy continues to suffer.

King Charles installed Rishi Sunak as Britain’s third prime minister in less than two months. Sunak will have to form a cabinet to tackle the country’s economic and political issues.

The U.K. is currently facing many economic and political challenges; inflation reached a 40-year high of 10.1% in September during a time when consumers are already struggling financially with the ongoing European energy crisis.

Sunak made it clear that difficult decisions would be made to restore economic stability and confidence without officially announcing what he had planned. We’re going to attempt to make sense of what this all means for the stock market.

Who is the new U.K. Prime Minister?

The brief term of Liz Truss, following Boris Johnson, has been deemed disastrous. It would be challenging to come up with a compelling argument to contradict this point, as her reign only lasted 44 days and her mini-budget sent the British pound plummeting to shockingly low levels. Truss announced her resignation on October 20, 2022 after her failed tax cut led to financial turmoil and a rebellion in her own political party. The former PM Boris Johnson then withdrew on Sunday after trying to return to his former position.

Rishi Sunak is the youngest British leader in over 200 years, and he must find a way to unite a divided political party. Sunak was a Goldman Sachs analyst until he entered parliament in 2015.

Economic positions

Rishi Sunak had an unsuccessful bid for leadership when he ran in opposition to Liz Truss very recently. Sunak’s previous role involved running the treasury during the pandemic; he was the finance minister from February 2020 to July 2022.

Here’s what we know about Sunak’s economic positions based on his campaign against Truss earlier this year. Sunak clarified that he would only cut taxes once soaring inflation had been tamed. He outlined a plan to cut income tax from 20% to 16% by 2029. Sunak was also a proponent of the independence of the Bank of England when it came to controlling interest rates. He has brought up the importance of government policy working together with the central bank to control inflation. Sunak also mentioned higher public spending.

Some political commentators predict that Sunak will bring in new taxes instead of introducing spending cuts, hoping the government would increase windfall taxes on energy companies. These policies are all speculation until November 17 when the economic plan is released.

Recent stock market turmoil

The U.K. and the U.S. have been dealing with many similar issues regarding soaring inflation and rate hikes, along with economic policies that have only worsened the situation.

When Liz Truss was in control of the country, her policies led to turmoil because the economic plan included tax cuts that many investors felt Britain couldn’t afford. The value of the pound dropped due to the so-called mini-budget, and there was economic pain because the cost of mortgages went up at a time when the country was still feeling the lingering effects of the pandemic.

Truss’ economic plan led to the sharpest drop of the pound against the U.S. dollar since March 18, 2020, when Boris Johnson first announced a nationwide lockdown. The tax cuts were intended to boost economic growth, but high-risk maneuvering caused significant damage to the value of the pound as the drop became worldwide news.

The new Chancellor, Jeremy Hunt, replaced Kwasi Kwarteng and withdrew all of Truss’s tax cuts to help stabilize the financial markets.

Since the new leadership retained Hunt, he will deliver the government’s new economic plan for taxes and spending on November 17 — a delay from the original date of October 31. Hunt has already warned that the government is dealing with “decisions of eye-water difficulty.” That doesn’t seem promising, but we will have to see what changes will be made, before we can assess their prospects. It’s worth noting that the Bank of England will be making a decision regarding interest rates on November 3, so the central bank won’t yet know what the government’s plan is when deciding on interest rates.

Will Rishi Sunak help the stock market?

Sunak has acknowledged that his country is dealing with “profound economic challenges,” and he’s stepping in at a pivotal time as the country needs some stability. Sunak is feeling the pressure of trying to gain investors’ confidence following the financial fallout caused by last month’s controversial tax cuts.

The markets have responded favorably to Sunak already, staying calm and carrying on after months of volatility. Britain’s main equity indexes even closed higher on Monday after the news. There are many reasons why the markets favor Sunak. The main reason is that the markets seek political stability; investors are fed up with a government that flip-flops on policy.

Many feel that they know what kind of PM Sunak will be based on his time as a chancellor, another stabilizing influence on the markets as long as the new PM remains consistent. Investors believe he knew how detrimental unfunded tax cuts could be to the economy. As mentioned earlier, we will have to wait until the next central bank announcement and the new economic plan to see how the markets react, if they do.

What impact does a Prime Minister have on the stock market?

It comes down to economic policy and investor confidence. The leader of a country and their party can introduce laws that will impact the economy, which then affect the stock market. We recently saw President Biden introduce the Inflation Reduction Act to slow down soaring inflation. We don’t know yet what kind of policies or laws Sunak would want to introduce, but we will know soon enough. For now, Sunak’s history in finance and government are chilling the proverbial beans.

Investor confidence refers to how people feel about the state of the economy, which is impacted by policies regarding spending and taxes. Investors look for political stability and sound economic policies.

We also have to consider the influence of the government on businesses. In the U.K., businesses are struggling with exorbitant energy bills, labor shortages, soaring inflation, and rising interest rates. When companies struggle to make money, they report lower earnings, which hurts investor confidence and leads to further pain in the stock market.

Soaring inflation, wages can’t keep up

It’s going to be difficult to improve the U.K.’s financial situation as the citizens continue to deal with soaring inflation that has impacted most of the world. To make matters worse, wages are set to decline by 3.0% in 2023 as the wage squeeze continues; statistics show that real incomes have decreased by almost £20,000 between 2008 and 2021 since salaries haven’t kept pace with inflation.

The U.K. still hasn’t fully recovered from Brexit or COVID-19. The country’s new leader is certainly in for a challenging time in office. While central banks control monetary policy, since they can raise or lower rates, the ruling government is responsible for fiscal policies that can impact the economy, so he should rightfully determine his own fate.

How should you be investing?

Regardless of which politicians are in office, it’s important to remember that you’re responsible for your finances and investments. Even in the best of times, investing in individual stocks can be risky. And with the fears of a global recession looming over us all, there’s plenty of volatility in the global markets. The good news is that you can make your portfolio more defensive and limit your exposure to risk during turbulent times. Take a look at Q.ai’s Inflation Kit, our artificial intelligence scours the markets for the best investments for all manner of risk tolerances and economic situations.

Bottom Line

Many experts are hoping that the new leader of the U.K. will bring political and economic stability to a country that desperately needs it. While some citizens question whether the new PM can relate to the average person who’s dealing with soaring energy costs and expensive grocery bills.

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