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Although British stocks have suffered since Brexit, further uncertainty and worries about economic growth and messy politics have made them “one of the first to be jettisoned” when investors move away from stocks, said Sue Noffke, the head of U.K. equities at Schroders.
Recently, bets against the pound have increased. Analysts have raised the alarm about its vulnerability to a steep decline because of Britain’s widening current account deficit. The deficit means the value of imported goods and services exceed Britain’s exports and other income from overseas investments; with energy prices so high, that gap is expected to stay wide. In the first quarter of the year, it was a record 8.3 percent of gross domestic product.
Britain’s budget and current account deficits mean it needs to borrow and is therefore increasingly reliant on what Mark Carney, a former governor of the Bank of England, called the “kindness of strangers.”
That kindness, or investor confidence, “cannot be taken for granted,” Shreyas Gopal, a strategist at Deutsche Bank, warned in a note just one day before Ms. Truss took office on Sept. 6. Without it, Britain would face a crisis.
In an analyst note, Mr. Gopal wrote that “a very large but untargeted spending package” risked exacerbating investors’ fears about the sustainability of the deficit. “If investor confidence erodes further, this dynamic could become a self-fulfilling balance-of-payments crisis whereby foreigners would refuse to fund the U.K. external deficit,” he wrote.
This “may sound extreme, but it is not unprecedented,” Mr. Gopal added. He pointed to the mid-1970s, when “a combination of aggressive fiscal spending, severe energy shock and a slide in sterling” forced Britain to seek a $4 billion loan from the International Monetary Fund.
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