HAMISH MACRAE: UK faces difficulty rebuilding confidence – fiscal orthodoxy will be the norm everywhere – we didn’t know that a few weeks ago, now we do

It’s an amazing time. Sure, there’s political chaos, but there’s also some financial clarity. Consider this. After what happened to Liz Truss, no government in the developed world will risk any policy that ends up with a large increase in borrowing.

Thus, fiscal orthodoxy will be the norm here and everywhere. We didn’t know that a few weeks ago. Now we do.

We also know that monetary orthodoxy will become the norm for the foreseeable future. We don’t know exactly how quickly central banks will raise interest rates, but bond markets passed several benchmarks on Friday.

Sinking sense: after what happened to Liz Truss, no government in the developed world will risk any policy that ends up with a large increase in borrowing

The yield on Germany’s 10-year government bond briefly rose above 2.5 percent, the highest since 2011. Yields in France topped 3 percent and British gilts returned above 4 percent. US Treasuries ended the day at 4.22 percent.

Put these two points together – that the developed world will have tight, or at least fairly tight, fiscal and monetary policies – and it gives some clues as to how the economic cycle will play out. And that, in turn, helps us think about the implications for asset prices around the world.

In terms of the cycle, this probably means a deeper downturn next year than seemed likely a few weeks ago.

It shouldn’t be particularly dire, but you’re already seeing consumers tighten their belts here in Britain and elsewhere as higher energy costs and higher interest rates hold back demand.

If the combination of tighter money and an economic downturn exposes financial weaknesses that have not yet surfaced, then there will be more disruptions, which in turn will lead to a deeper fall. Recovery will eventually occur, but it may be difficult to see for several months. Against this gloomy backdrop, the hunt for safety and value will continue.

They are not the same at all. Security is America and the dollar. The importance of Great Britain and Europe.

US asset prices fell significantly. In terms of stocks, the S&P500 is down 23 percent this year, the Nasdaq tech index is down 33 percent, and the Dow Jones is down 16 percent. But they may still be falling, as even at these levels they are overvalued in most measures compared to European and UK stocks. The general feeling in New York is that stocks have not yet bottomed.

On the other hand, the dollar provides security. Its weighted value has risen by about 17 percent this year, so foreign investors have some compensation in local currency for any losses on their investments. The US economy, despite its weaknesses, does not face the energy stresses that Europe and the UK must plan for this winter.

If you really want value, the UK will give it to you. The FTSE100 companies have a price-to-earnings ratio of around 14 and a dividend yield of 4.2 per cent is covered 1.8 times.

Footsie companies make around 80 per cent of their profits overseas, so what you’re buying is a bet on the global economy in sterling.

But there are obvious political risks, including unexpected taxes on two key sectors, energy and finance. The UK offers no security to investors, except in the sense of a decent stream of dividend income.

I expected confidence in the UK to gradually return, but the opposite has happened.

Whoever ends up running the show has a long way to go to rebuild trust. At the same time, any foreign investor willing to take the long view can buy UK assets on the cheap. The flow of opportunistic applications will continue.

The pound fell below $1.11 on Friday before recovering to $1.13. For a US investor, having the pound below $1.15 is a once-or-twice-in-a-career opportunity, as the pound hasn’t been in that area since 1985.

However, it takes a person with a very far-sighted perspective to understand this.

Whenever there’s huge uncertainty like now, it’s important to let go of what you know and be honest about what you don’t know.

I am comforted by the fact that the world has returned to fiscal orthodoxy and monetary common sense. We know that for sure.

For the rest, at least for the UK, the uncertainty won’t last forever, even if the next few days are indeed challenging.