Stop! Everyone! Take three deep breaths. In through the nose, out through the mouth; one….two…three. Well done. Slow the pulse, reset the nerves. That’s better. Ready? Now, start again. Proceed quietly in an orderly fashion.
“Intelligence is no bar to stupidity”
That heading says much for the febrile environment. Raising dysfunction to an art-form, it is almost as though policymakers have taken a collective leave of their senses in the last three weeks since the already defenestrated Chancellor’s ‘fiscal event’, a 20-minute mini-budget which turned simultaneously in to a major car-crash with his own back benchers, the markets and the IMF. Ironically, having previously compared us unfavourably with a banana republic, the IMF admitted this week that left to its own devices with ‘Trussnomics’ the UK could potentially have had the strongest growth in the G7. Too late now!

Despite a 71-seat majority, the Conservatives have degenerated into a fringe protest group rather than a party of government. Themselves an ungovernable rabble, they seem hell-bent on self-destruction. Of the three elements on their throwing out list, two have gone already: Kwarteng and his budget, including the key plank of Truss’s leadership manifesto, her tax cuts. Given she now has neither authority, nor control, nor a mandate nor any credibility (and if you think Jeremy Hunt is the answer to your prayers, you have a bigger problem than you thought), logically she has to be the third to be cast into the political abyss.

Meanwhile down in Threadneedle Street, allegedly “On High Alert” for the next market crisis (according to a Telegraph headline), having completely missed the incipient LDI vortex staring it in the face, the Bank of England was incapable of giving anything other than a magnificently mangled message as to the simple proposition of whether October 14th was a hard deadline or not for its temporary market intervention: cue, another week of disorder in the gilt market in which the Bank is directly responsible for maintaining order. Governor Bailey then turning on the Pensions Regulator and the Prudential Regulation Authority (effectively accusing them of having been asleep at the wheel) fair took the breath away.

The media is gleefully reporting every tortured twist and turn with relish. Chris Mason, the BBC’s Political Editor and the country’s High Priest of Political Opinion, with his idiosyncratic nod and mouth-down-at-the-corners smile every time he finishes a piece to camera, is in his element.
Is it snowing or Tuesday?
This is not a political column. However, sometimes domestic politics have a direct and pronounced effect on markets and need commenting upon. Such a time is now.

The British Conservatives are (or more accurately were) envied across the western democratic world as the most formidable, ruthless political party, the embodiment of a natural machine of government, the one to emulate. That reputation is currently in tatters. Apart from a brief period following the 2019 election and Boris’s landslide victory, it has been in a near permanent state of internal turmoil dating all the way back to David Cameron losing his own Brexit referendum in 2016 (in fact, since John Major’s resignation in May 1997, the Conservatives have had seven leaders, the average duration to date being three-and-a-half years but David Cameron was leader for 11 of those 25 years).

It says much for Labour’s own dysfunction when under Jeremy Corbyn (and love him or loathe him, also for Boris’s personal appeal to a broad electorate as an undeniable and serial vote-winner in his own right) that the Tories remain in office after 12 years despite all their tortured travails. And now, after only six weeks at the helm, for two of which we were in animated suspension with The Queen’s funeral, they are seriously contemplating throwing out the leader elected through their own voting system, making her potentially the third Prime Minister to have been ejected from office by his/her own side in three years, and just to ram the point home, the second in three months.
Labour had its moments, especially with Clause 4…

All parties suffer bouts of being ill-at-ease with themselves both in and out of office. It is the nature of the political beast. An ideological chasm divided Old and New Labour on the fundamental socialist principle of Clause 4, the cornerstone of the Labour Party’s foundation (“To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution, and exchange, and the best obtainable system of popular administration and control of each industry or service”). The argument to amend (i.e. dismantle) Clause 4 was eventually won by Tony Blair in 1995 after an intense and bruising battle for which the Left never forgave him, despite his winning three general elections in succession, Labour’s most successful leader ever. But even in office, on virtually every area, from the economy through to defence, education and nuclear disarmament, the war with Iraq, underlying policy tensions were palpable. As the factional balance of power shifted through the phases between Blair’s landslide victory in 1997, ending up at the opposite end of the spectrum under Jeremy Corbyn with his Marxist beliefs from 2015, Labour has been ill-at-ease with itself for quarter of a century. Only now is Keir Starmer beginning to restore order and making Labour appear electable again, all the while dancing on the head of a pin between the right and left wings of his party where Old Labour still fears its own particular brand of hard socialism is being diluted.

Tories unable to lay The Lady’s ghost to rest
But the Conservatives in 2022 are not merely ill-at-ease with themselves. They are at war, engaged in all-out internecine, blue-on-blue combat.

After the ejection of Margaret Thatcher in 1991, the last Tory leader with real ideological conviction and with the courage to see it through (Europe, the fallout from Westland, her Poll Tax and her own increasing political isolation within her cabinet were her undoing), the Conservatives have been an ideology-free zone. That lack of a focal point, no political centre of gravity around which to agree and coalesce, has been an enduring problem. At its root, they cannot agree on what 21st Century Conservatism either is or should be.

The ghost of Thatcher still haunts British politics more than three decades since she left office and nearly a decade after her death. It was visible in the recent Tory leadership election: however disparate their beliefs, every candidate burnished their credentials as Thatcher’s heir as if simultaneously clutching for both an identity and a lifebelt. But it dogs the opposition parties too: defensive pent-up resentment bordering on outright hatred is readily betrayed in such sentiments as expressed by Angela Rayner, Labour’s deputy leader, and her branding Tories as “Scum”, and Nicola Sturgeon, the Nationalist Scottish First Minister’s outburst last week declaring how much she “detests Tories”.

But the Conservatives themselves do not know how to deal with Thatcher’s legacy. They have spent years distancing themselves from her (remember Theresa May and her “Nasty Party” comment?) as they moved to the centre ground politically and embraced what are essentially left-of-centre Social Democrat Keynesian fiscal policies. The left wing of the party sees its natural centre of gravity embracing One Nation Toryism defined by a significant public sector and, through a high tax burden, being comfortable with redistribution of wealth, albeit well short of what Labour would pursue (HMRC data shows that after 12 years of Tory or Tory-led administrations, currently the top 1% of earners pay 29.1% of all income tax raised, while the top 11% account for 60.5%).

To the right, on the one hand monetarist Thatcherites constantly betray defensive tendencies, well aware of the extent to which Thatcher still divides opinion but on the other hand they remain convinced of the rights of the individual over the overbearing demands of the State, and the fundamental belief that a vibrant private sector which encourages and celebrates rather than stigmatises wealth creation is ultimately to the economic and social benefit of all.

Having forced a budget U-turn on tax, it will make it doubly difficult in future to revisit the policy. It is a political elephant trap of their own making.
And now they have Boris’s legacy haunting them too
But if Margaret Thatcher casts a long shadow, so too does Boris. He delivered the Conservatives an unexpected 80-seat majority in 2019. They politically shot him in 2022 (if he had not provided the opportunity with ‘Partygate’, the anti-Boris brigade would have found another excuse, so obtuse is the current Parliamentary party). In his absence, but understanding, or more accurately confused by, his magnetism to the electorate (even as recently as two weeks ago, a poll of those who voted Conservative in 2019—not just paid-up party members– 63% still wanted him as Prime Minister and, of himself, Sunak, Truss and Starmer, he was the only one with a positive approval rating), they are struggling to square how to keep former Labour voters on side in the Red Wall seats (viz the Wakefield and Batley & Spen by-elections), while simultaneously not completely alienating ‘traditional’ Tory voters, those who already feel marginalised to the point of rejection by the leadership, in the shire constituencies (e.g. Tiverton and Amersham).

They are currently a million miles away from finding the answer, stranded and s(t)inking in a political midden. The tension was encapsulated this week in a rancorous meeting between Truss and the back bench 1922 Committee when Sir Robert Halfon accused the Prime Minister of turning her back on blue collar workers.
Symptomatic of a wider problem not confined to the UK

And there is the rub. Halfon’s comment betrays a much broader and more profound conundrum confusing all politicians, not just in the UK but across the West. There are many complex factors driving the increasing polarisation and up-ending of political allegiances: nationalism, immigration, perceptions of disenfranchisement (not that you can’t vote but the perception that it makes no difference when you do, the ‘establishment stitch-up’ argument), ‘wokeism’, climate change politics and the environment, sectarianism, to name but a few. It is a wide and varied list. At the national level more specific factors are at work too: here, the fallout from Brexit and the potential balkanisation of the United Kingdom; in Spain Catalan independence; in Germany, three decades on from reunification, east and west tolerating each other but still with little love lost.

The social and political consequences of QE
But there is one powerful additional factor, directly relevant to investors, which over the past near decade-and-a-half has had an impact, even if it was not by design (obeying the law of unintended consequences).

First identified by former board member of the US Federal Reserve Bill Dudley as a political and social risk rather than merely an instrument of economic policy, it is the insidious and pernicious effect of quantitative easing. We have discussed in these columns many times before the effect of the central bank pouring liquidity into the system, mechanically buying bonds with the resulting significant asset price inflation causing all assets both to appreciate and correlate. The political and social effect is created by the perception (and we all know that perception becomes reality in the eye of the beholder) that those with assets have made off like bandits, while those with few or none have been left behind, poor as church mice, in fact even worse off thanks to QE contributing to the zombie economy, maintaining employment but with falling real earnings.

That measurable wealth gap between the ‘haves’ and the ‘have nots’ has been a powerful stimulant behind the acceleration in political polarisation, both right and left, over the past ten years. It is goes under the heading of populism. On the right it contributed towards the rise of the Freedom Parties in Austria and the Netherlands; the League and the far-right Brothers of Italy are now both in coalition government in Rome; to Marine Le Pen’s National Rally party in France; to Trumpism in the US; UKIP in the UK. On the left, much the same effect: Corbynism and Edinburgh’s SNP/Green coalition in the UK; the Greens in Germany; Syriza in Greece; Podemos in Spain; AOC, Elizabeth Warren and Bernie Sanders driving the left-wing agenda among the US Democrats.

Not only is it creating polarisation but a swapping of political allegiances. The most obvious example is in the US where the traditional patrician Republican supporters of the Grand Old Party have migrated towards the Democrats, while what would have been left-leaning blue-collar workers are now the bedrock of Republicanism. The UK is not dissimilar, as evidenced by Halfon’s concern about Conservative blue-collar workers in ‘Red Wall’ seats. In France, in less than half a generation, the traditional centre-ground Republican and Socialist parties have been eclipsed both by polarisation but also the emergence from nowhere of Macron’s nebulous La Republique En Marche in 2016/17.
Nailing jelly to a wall? Or looking for a needle in a haystack
As political parties across the western democracies to a greater or lesser extent struggle to cope with re-establishing their identities and their credentials with the electorate (and as often with their own members), it is not surprising that a political system that is increasingly fractured makes heavy weather of governance and government. A difficult situation is compounded by the additional political and economic burden of the exogenous shocks created by a pandemic and Putin and the struggle to find the ‘right answer’. As we have been writing about for weeks if not months, and the IMF only conceded this week, with central banks’ monetary policy and governments’ fiscal policy pulling in opposite directions, we have not found it yet.

For investors, as ever it is all playing out as ever in the considerable volatility we are experiencing in currencies, bonds and equities. But in such febrile times it pays to keep a cool head, and an open and flexible mind. And to take those three deep breaths.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.

The value of active minds – independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM. 28417