UK equities: Thoughts following the Budget

This week’s Budget had been well trailed in the media, so there were few major surprises when the Chancellor stood at the dispatch box to deliver her speech.

The simple summary is that the Budget increased Government spending by £70 bn in 2026-27 –a mixture of increased spending on current account and increased net investment. Overall, the increase amounts to around 2% of GDP. Taxes are expected rise by £36bn, leaving the balance to be funded by increased borrowing.

The main source of increased taxation revenues will come from increases to employer’s National Insurance (NI) (a tax paid by companies which is additional to amounts paid by companies to employees). In addition, the Budget announced an above inflation increase to the minimum wage, which is likely to have ripple effects right across pay scales. Both measures will add to costs of businesses, which we expect them to try and pass on – i.e. they will be inflationary.

Tension is likely to be greatest in low margin labour intensive businesses, especially in the retail and service sector. Costs that cannot be passed on will need to be absorbed by companies in lower profits, or by workers through lower wage increases. 

On the more positive side however, the increase to the minimum wage will put more cash in the pocket of lower income households which is helpful for spending levels (and therefore a boost to retail and service sector businesses).

The balance on increased taxation is to come from a range of measures on areas including: Capital Gains tax, Inheritance tax, and VAT on private school fees.

The Government also announced that it will not proceed with the mooted British ISA due to “mixed responses” to the consultation launched in March 2024.

In the first 24hrs since the Budget UK 10-year bond yields were up around 20 basis points at 4.50% (having increased from 4.00% at the start of the month), reflecting the higher level of borrowing, and bring yields almost exactly in line with the peaks reached following the Kwarteng / Truss mini-Budget of September 2022. Sterling has held firm at just under $1.30 versus the US Dollar, and €1.19 versus the Euro.

Ultimately, success or failure of the Budget plans depends on how well the Government spends the money raised. The budget yesterday highlighted some broad areas of increased spending (including on the NHS and on education), but for the detail we will have to wait until the results of the Spending Review, which is expected to conclude in Spring 2025.

UK Equities Post Budget - muted immediate impact, but highlighting the importance of Value as a factor

As for UK equities, the overall impact (either way) is likely to be muted. There are likely to be potential winners among companies that are able to successfully partner with the Government in delivering on expenditure and investment plans, and some losers among companies that are unable to pass on the increased burden of taxation. Post the Budget, we remain of the belief that risks to growth in the UK are upside, supported by household spending out of a robust household net balance sheet, and increased real incomes. 

The Budget has in our view likely added to near term inflationary pressures, and therefore reduced the scope for near term cuts to interest rates presenting something of a challenge to hopes for a housing led recovery in spending.

As ever, a reminder that only around 25% of revenues of the FTSE ASX comes from the UK. The budget will have zero effect on HSBCs sales of investment products into China, in AstraZeneca’s oncology pipeline for eventual sale into California hospitals, nor on Anglo American’s mine restructuring plans.  The long-term economic effects of yesterday’s Budget will play out over the remaining four years of the current Parliament. But for better or for worse, the UK economy is NOT the same as the UK stock market.

The Budget has though underlined our long-held view that the UK (in common with many global economies) is likely to feature ‘bigger’ government – leading to on average higher inflation and interest than we saw in the years following the GFC. Value will matter more than it has done, and the UK offers value as well as diversification benefits from offering something “different” to global markets.