In response to today’s Budget, Schroders’ economic and investment experts share their views.
On UK macro, David Rees, Head of Global Economics, said:
“On paper, today’s Budget has done enough to put the UK public finances back onto a sustainable path and may allow the Bank of England to cut rates a bit further, but we suspect it will not be long before the government is forced to come back with more fiscal consolidation.
“The government’s poll ratings meant the Chancellor backed away from plans to raise income tax, instead opting for a range of smaller, back-loaded measures to raise revenues in order to rebuild headroom of around £20 billion. Those less efficient policies mean revenues are likely to fall short of the government’s expectations as we head into the next general election. At the same time, pressure will remain for the Chancellor to keep spending as the government is buffeted from both sides of the political spectrum.
“Moreover, we remain concerned that contagion from global fiscal worries – Japan is stimulating again, President Trump wants to write cheques to households and France’s budget worries are reaching a crescendo – could put upward pressure on gilt yields and quickly eliminate the UK’s headroom.”
On UK equities, Duncan Green, UK All-Cap Fund Manager, said:
“The Budget has weighed on business investment and consumer confidence, and while today’s announcement brings some clarity, markets remain cautious given fiscal tightening has been largely pushed out to later years and a slight downgrade to the UK growth outlook.
“Importantly though, the Chancellor avoided the inflationary missteps of previous Budgets. The new measures align with the Bank of England’s goal to bring inflation sustainably back to target, with planned energy-bill reductions helping. The Chancellor also secured a larger fiscal buffer than expected, which markets welcome as a sign of discipline.
“The sectoral impacts are mixed. Housebuilders received little direct support, and gambling firms face higher duties, while banks were spared new taxes. With attractive valuations and continued underperformance versus the FTSE 100 and global peers, UK mid- and small-caps could be well positioned as stability returns.”
On UK Fixed Income, Marcus Jennings, Fixed Income Strategist, Global Unconstrained Fixed Income, said:
“Although the Chancellor delivered a Budget that was close to market expectations, providing a short-term relief rally, it has likely fallen short of allaying more long-term fiscal concerns for some investors.
“Ultimately the back loaded nature of the fiscal tightening announced today, combined with the lack of any bold moves to control the debt trajectory in the short run, will leave some investors not fully convinced of the UK’s long term debt trajectory. This is demonstrated by the Office for Budget Responsibility forecasting higher fiscal deficits in the next few years compared to projections from both earlier in the year, and prior to today’s Budget.
“For now, we prefer long UK duration positions towards the front end of the curve. This is based on our view that the Bank of England is likely to ease policy more aggressively, due to subdued growth, a sluggish labour market and continued disinflation, the latter of which was helped at the margin by today’s Budget.”
