Chaos in UK markets threatens equities and corporate bonds

According to Jefferies’ strategists, UK equities and corporate bonds are facing possible selling pressure due to the liquidity needs of UK pension funds that employ so-called liability investing techniques.

Although they have come under pressure to sell gilts to meet margin calls following UK Prime Minister Liz Truss’ announcement of sweeping tax cuts last month, funds could worry about buying them back at higher prices in the future and selling shares instead must, the strategists including Sean Darby said in a note to clients.

Gilts rose higher yesterday after reports that UK officials are working on a reversal of tax cuts.

The potential for pension fund sales will send shivers down the spines of UK domestic stocks, which have fallen more than most this year, weighed down by a slump in sterling and a cost of living crisis.

It could also threaten the outperformance of the blue-chip FTSE 100 index, which so far has been boosted by its heavy international exposure.

Asset sales by UK pension funds have resumed in recent days after Bank of England Governor Andrew Bailey warned fund managers they must unload positions they cannot hold by the end of this week before the central bank discontinues its market support.

Jefferies continues to favor cheaper, so-called value stocks in the UK given the rise in gilt yields ahead of yesterday, Mr Darby wrote. Chaos in UK markets threatens equities and corporate bonds

Fry Electronics Team

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