Immediate thoughts on the Budget

Tuesday, 30th October 2018 15:02 - by David Harbage

The author does not intend to deliberate over the detail in the Chancellor’s statement – the reader can peruse websites and newspapers for the fine detail on the issues that interest them – but rather provide a perspective from a stock market investor’s perspective.

Philip Hammond delivered a ‘something for everyone’ set of measures (heavy smokers excepted) that appears politically astute: addressing the issues that were most likely to persuade the British electorate to vote for an alternative to the Conservative administration. Choosing to put a promised pay-down of debt to one side, a major increase in spend on the NHS, with lesser sums on other high profile areas of public concern including help for small retailers’ business rates, were accompanied by an easing in the introduction of Universal Credit, an on-going freeze on fuel tax rates and an unexpected hike in personal tax allowances.

While sterling and conventional bonds weakened in anticipation of more government borrowing, inflation-linked issues firmed in response to the prospect of higher inflation resulting from the Chancellor’s stimulative measures. Although certain industry-specific announcements impacted (such as lower-than-expected tax rates applied to online gaming and the timing of the reduction in stakes on Fixed-Odds Betting machines, which pleased the likes of Ladbroke owner GVC Holdings and extending Help-to-Buy to 2023 that aids house builders such as Bellway), the overall UK equity market took heart from the diminishing prospect of a higher taxing Labour administration taking power, come the next election. Against the backdrop of a divided (on Brexit), weak Conservative leadership with the slimmest of parliamentary authority and a population increasingly unenthused by politics, a ‘protest’ vote electing Jeremy Corbyn’s Labour party – with its higher taxing and business-unfriendly agenda – could see the FTSE100 retreat back below the 6,930 level, seen at the turn of the millennium, and head down towards 6,000.      

It is the political dimension that is of greatest interest to this apolitical writer. Procuring some sort of a ‘deal’ on Brexit - that can enable trade between the UK and the European bloc to continue without tarrif application or other hassle – remains the critical issue overhanging domestic stock exchange listed businesses. Projections from the government established, but independent, Office of Budget Responsibility (the OBR) suggest a small improvement in local growth over the next five years, driven by higher employment (forecasting 800,000 new jobs by 2023) and real wages. However, annual real GDP expansion of about 1.7% remains dull by historic standards and any significant shock (such as a ‘no deal’ on Brexit, as intimated by the Chancellor) is likely to require a further economic stimulus to counter adverse sentiment. That consumers are already ‘drawing their horns in’ was evidenced by yesterday’s announcement of slower borrowing in September – ranging from credit card expense to higher ticket motor cars (sales fell 20%) and home mortgages (approvals slipped from a 7 month high of 66,101in August to 65,269) – as credit growth slowed to 7.7% from 8.2%.

When the Budget’s measures impact (typically with effect from June 2019), sentiment should be boosted by a further significant fall in unemployment (OBR forecasts 3.7%) alongside greater clarity on the consequences of Brexit. Meantime, as ever, stock markets are forward looking, and while the Budget has come and gone (without causing any negative impact), investor attention will no doubt focus on US-China trade relations and evidence of a slowing European economy - alongside ‘bottom-up’ company specific news of trading. To date, in regard to the latter, the most recent quarterly results from leading US and multinational businesses have shown healthy earnings and dividend growth. Insofar as the UK equity market is concerned, it is the prospect of acquiring a 4.25% income yield on the overall FTSE100 index – at its current, at the time of writing, 7,000 level – that holds greatest appeal to this observer, reinforced by an expectation that going forward, companies will be announcing higher dividends. 

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.