David Clark is an investment director at Saracen Fund Managers

It is with some trepidation that I start writing this article. I fear it will be out of date by the time it is published. Commenting sensibly on matters relating to the UK stock market is a challenge at the best of times and these are emphatically not the best of times. The Prime Minister has resigned, and events continue to move swiftly on economic and political fronts.

We have no idea what the next Prime Minister will do, but it is a safe bet that whoever it is will not make the same mistakes as their predecessor. Markets are craving stable government and competent leadership. Aren’t we all. A fiscally responsible Budget on October 31 with an independent assessment by the Office for Budget Responsibility would seem to be a pre-requisite.

The mini-budget opened a £45 billion hole in the public finances that has since grown to £60bn as a result of the rising cost of Government debt. It is therefore unlikely Chancellor Jeremy Hunt’s reversal of the promises made in the mini-budget will be tampered with. He has reintroduced all measures designed to raise revenues, and this should net the Treasury around £32bn.

Additionally, the energy price cap freeze will now be in place only until April 2023, as opposed to the previously announced two years. This has important implications for inflation (hint: none of them good). It seems that for now, the costs of the energy price cap freeze will be significantly lower than the £100bn previously expected.

The Bank of England has indicated it expects bond markets to remain stable for now.

So, sterling has bounced, helped by the PM’s resignation, gilts are rallying, and markets are calming down. As a result, surely investors can find attractive opportunities in the UK market.

That the UK market is cheap both in absolute and relative terms has been highlighted by market commentators for some time. The UK market always looks cheaper than the US, but that discount is usually only around 15 per cent. It is currently 30%. Were gilt yields to fall further, then there are some sectors that should benefit fairly quickly. These include housebuilders (very cheap at the moment and one of my favourite sectors) and retailers, as well as real estate.

It is interesting to note that in times of higher inflation, fixed rate mortgages are preferred over flexible rate ones. Nothing too surprising there perhaps, but the scale of the shift in the UK has been quite marked. Before the housing market collapse of 2006/08 more than 80% of mortgages in the UK were floating rate. Today, according to the Bank of England, 85% of all UK mortgages are fixed and around 91% of newly issued mortgages are fixed rate. In Europe, a 10-year fixed rate mortgage is standard, and, in the US, it is a 30-year fixed rate mortgage. Why UK lenders are only able to come up with two- and five-year mortgage deals is one of the great mysteries of finance.

I read recently that countries with more persistently high rates of inflation have a higher home ownership rate as property tends to act as an efficient store of value over the longer term. Perhaps another reason to buy housebuilders.

Of course, that does not mean all our troubles are now in the rear-view mirror. Interest rates will still have to rise to combat inflation, which will remain persistently high and is now over 10% for the first time since 1981. Also, earnings revisions by analysts are overwhelmingly in negative territory. Alas, this means any recovery could

be short-lived as these factors fundamentally contribute to a weak outlook for the equity market. It is certain there will be no quick fix for inflation, and it will remain stubbornly high for some time to come.

Rising inflation and the cost-of-living crisis have lifted energy stocks and banks and hurt growth stocks. As it happens, value stocks tend to do quite well with high inflation rates. Throughout the 1970s, value stocks performed well versus growth stocks, but even at more moderate levels of inflation of around 2% to 4%, value tends to do all right. It is only once we enter very low inflation periods or deflationary periods that value tends to lose performance – witness the last 10 years or more.

We do know the Chancellor has said Government departments will have to find ways of saving money – public spending is still increasing and currently stands at about £1 trillion.

What is not clear is where these cuts will come, how deep they will be and to what extent they will affect previously announced projects, be they of an infrastructure nature or otherwise. That would involve forecasting of a heroic nature. I would be mad to have a go at that.

I leave these sorts of things to the Treasury.