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Budget verdict: "steady as she goes"

Thursday, 4th March 2021 07:55 - by David Harbage


“Things can only get better” opined our last blog when looking at the prospects for 2021, with the hope that the Covid vaccines would enable a return to normality. The rollout of the critical vaccines has progressed well in the UK and in the US (with a less impressive rollout in Europe) and, although governments seem slow to ‘unlock’ economic and travel sanctions, the second half of 2021 is promising to be brighter.

However, after a burst of optimism in the first week of 2021 – the FTSE 100 index rose 6% to reach 6,912 – the UK stock market has marked time and drifted with little conviction in recent weeks. The market truism that “it can be better to travel than arrive” comes to mind, when considering the vaccine rally since the beginning of November (when the FTSE 100 stood at 5,520).

Ever forward-looking, equity investors are endeavouring to assess the prospects for corporate health when ‘normal service is resumed’ (featuring the withdrawal of public support for businesses and employment) in the economy. This year’s Budget was therefore keenly awaited. Would economic recovery be ‘bath’ or ‘V’ shaped, impacted by consumer sentiment and the modus operandi of withdrawing HMG support? Would the public sector deficit be addressed, when and who would make reparation?

Rishi Sunak appears to have played a sensible strategy in maintaining packages of Coronavirus support for a few months more (furlough workers, grants to self-employed, business rates, reduced stamp duty on property transactions) and excise duty ‘freezes’ on alcohol and fuel to enable consumer and business confidence to recover. While also announcing the prospect of income tax thresholds being frozen between 2022–2026, and corporation tax being hiked in 2023 from 19% to 25% for businesses generating profits in excess of £250,000. Essentially a return to some austerity in the future – hopefully when the economy has recovered and is better able to take the pain.

A sensible series of measures which could see house builders like Persimmon (LSE:PSN) who reported their final results today – featuring average selling price of £230,534, with 50% of private homes going to first time buyers, in 2020 – benefit from the return of 95% Loan-to-Value mortgages (following HMG 80% backing of such loans). In addition, hotel, restaurant and pub owners such as Whitbread (LSE:WTB) (Premier Inn) and JD Wetherspoon (LSE:JDW) can be expected to enjoy the release of pent-up demand from UK consumers this summer, aided by the extension of lower 5% VAT rates until September and 12.5% until March 2022.    

Do the Chancellor’s observations, warnings, series of measures and forecasts change one’s opinion on the outlook for the domestic or global economy and for company share investment? A nautical “steady as she goes” projection would seem to summarise this Budget, made at an exceptionally difficult time to call economic activity and therefore the financial markets’ likely prognosis over the next year or so.

The writer retains a view that a probable pick-up in inflation is likely to mean that low duration assets, notably highly valued growth-oriented equity may succumb to further bouts of profit taking - especially if interest rates and bond yields creep higher, which will put further pressure on the indebted. While the corporate sector is almost certainly in better financial heath than in the previous financial crisis of 2008, governments may struggle to service their burgeoning debt which in turn would give rise to a less stable environment for financial assets. In particular a pick-up in longer term interest rates, especially on sovereign debt, would adversely impact the fair valuation of company bonds and shares.  

Investors need to be particularly diligent in their choice of individual company investment and, against a landscape of rising bankruptcy over the next two years, this author would have a preference for actively managed, well diversified collective investments to minimise stock-specific risk. In response to a request, the previous blog’s comments on preferred areas for long term investment have been updated and, retaining a wish to avoid fixed income investments, the following risk assets continue to have appeal for this particular observer:

Gold – physical metal (i shares ETC), biggest producers (i shares ETF) and the actively managed Golden Prospects investment trust (LSE:GPM) of smaller miners - the limited supply precious metal should benefit as fiat currency expands, as a result of governments’ stimulus packages.

Global equity – with a focus on either defensive business activities Scottish investment trust (LSE:SCIN) or high quality growth companies Smithson investment trust (LSE:SSON), large, technology focused industries Scottish Mortgage investment trust (LSE:SMT) or an attractive discount to underlying asset worth Brunner investment trust (LSE:BUT).  

UK smaller and medium sized companies – in expectation of M&A activity and appreciation of their growing ownership of technology assets: JP Morgan Mid Cap (LSE:JMF), Miton UK MicroCap (LSE:MINI), River & Mercantile UK MicroCap (LSE:RMMC) and Schroder UK Mid Cap investment trusts (LSE:SCP).

UK equity – focus on large, high quality growth businesses Finsbury Growth & Income investment trust (LSE:FGT) and multicap, thematic investors Diverse Income (LSE:DIVI) and Artemis Alpha investment trusts (LSE:ATS).

Private equity – often with a bias to the digital or internet-facilitated age, set to make acquisitions at distressed prices in weak economic conditions, priced on significant discounts to net asset value: Harbourvest Global Private Equity (LSE:HVPE), Standard Life European Private Equity (LSE:SLPE) and Pantheon investment trusts (LSE:PIN) or technology-rich Oakley Capital (LSE:OCI) and ICG Enterprise investment trusts (LSE:ICGT).

Flexible - multi asset manager, with a focus on real, inflation-proof capital preservation on an attractive discount to NAV Caledonia investment trust (LSE:CLDN).

Specialist – industrial warehouse property Tritax Big Box (LSE:BBOX) and Tritax Eurobox investment trust (LSE:EBOX), global infrastructure spend Ecofin Global Utilities & Infrastructure investment trust (LSE:EGL), clean energy, water & waste Impax Environmental Markets (LSE:IEM), music rights Hipgnosis Songs (LSE:SONG) or an attractive discount to net asset value Picton Property Income investment trust (LSE:PCTN).

Finally, as ever, please note that the above mentioned investments are not a recommendation; readers must carry out their own due diligence.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.


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