Caroline Shaw, multi asset portfolio manager at Fidelity International has shared her thoughts on today’s UK budget.
Today’s ‘bits and pieces’ budget doesn’t materially change the UK macro outlook. The restoration of more fiscal headroom should be enough to placate the bond markets for now. The most consequential measures were those aimed at reducing UK inflation, such as the freeze in rail fares. These were designed to give the Bank of England (BoE) as much room to cut interest rates next year as possible, potentially shaving 0.3-0.4 percentage points off inflation.
With inflation continuing to ease, in addition to signals that the labour market is softening, we expect the BoE to resume rate cuts. This should be supportive for Gilts, an area where fundamentals are already improving, although we are cautious on government bonds overall due to the impact of tariffs on inflation and fiscal issues. Sterling, by contrast, faces a tougher backdrop with a combination of policy uncertainty and the prospect of lower rates.
The outlook for UK equities is less clear cut. Earnings remain fairly uninspiring, and the announcements in today’s budget aren’t enough to improve growth meaningfully. That said, the UK market still trades at a discount, balance sheets are robust, and buyback prospects are decent, while any sterling weakness should provide support for multinational large caps. Given the challenging landscape of policy adjustments and fiscal pressures, we prefer to gain UK equity exposure through active management to take advantage of stock selection opportunities and dispersion between sectors. Overall, we believe the most compelling opportunities in equity markets are found elsewhere, particularly in emerging markets such as China and India.
