After all the speculation ahead of this eagerly-awaited budget, today’s statement from Chancellor Rachel Reeves in the House of Commons has certainly given wealth managers plenty to think about – as well as most of the British public for that matter. Her opening mantra was the need to ‘invest, invest, invest’ to promote economic growth and ‘fix the foundations’ whilst maintaining economic stability.
Of course, much of the direction of travel for today’s budget statement had been leaked/briefed out in advance, especially the headline measures, warning of the ‘tough decisions’ involved. With the goal of trying to find c.£40bn to fund public services and growth now confirmed by the Chancellor, given the fiscal ‘black hole’. The Chancellor has also had her hands tied by the manifesto pledge not to raise taxes on working people. Today, Reeves said she is maintaining the BoE’s inflation target of 2% with the forecast to be 2.5% this year and 2.6% next.
However, by changing the debt rules, to allow govt borrowing to invest in capital projects such as infrastructure spending, some additional borrowing capacity would be created before she hits her fiscal rules. Plus tax changes from the likes of employer NICs, CGT, IHT are set to contribute to the main measures the government wants to introduce such as extra spending for the NHS, recruiting more teachers and boosting investment in school buildings etc. Today’s budget is certainly a major statement of intent and looks set to shape the rest of the parliament in the months and years ahead.
What do investment strategists and managers make of today’s budget measures?
Are they worried about another Kwarteng moment, with a possible adverse reaction from the markets to concerns about rises in the cost of borrowing? Or has it all been briefed out enough to calm nerves?
Experts from across the industry have been sharing their reaction to today’s budget statement as follows:
Commenting on today’s Autumn Budget, Chris Cummings, Chief Executive of the Investment Association said: “We share the Chancellor’s vision to grow the UK economy and “Invest, invest, invest”. Long-term investment is truly the engine of growth, and our industry already channels £1.4 trillion into the UK economy.
“Long-term investment also needs clarity of approach and policy certainty. The proposed modern industrial strategy and corporate tax roadmap are a welcome starting point to attract greater capital. We look forward to working with the Government, alongside the National Wealth Fund, to channel investment into innovation and growth-driving sectors. But this is the beginning of the journey and more will be needed to build domestic and international confidence to drive strong UK capital markets and reinvigorate economic growth in partnership.
“Fostering a culture of inclusive investment is also important to improve people’s financial resilience, yet today’s Budget was a missed opportunity to implement measures which could see more people reap the benefits of investing, such as ISA reforms.
“We will study other aspects of the Budget, such as the intention to levy inheritance tax on unused pension fund, to ensure this doesn’t bring adverse outcomes at a time when people need to be doing more to secure their standard of living in retirement.”
According to Peder Beck-Friis, Economist at PIMCO, “After all the pre-Budget trailing, there were no big surprises in today’s budget. The government hiked taxes, increased investment spending, and loosened its fiscal rules. Importantly, the deficit will fall in future years — by more than two percentage points in three years — so fiscal policy will remain tight, more so than in most other developed countries. The overall gilt remit was broadly in line with expectations too.
“There are no reasons for us to question the fiscal credibility in the UK. The government intends to bring the primary deficit into a large surplus, for the first time since the early 2000s. While debt — by the conventional definition — may not fall in coming years, it is unlikely to rise dramatically either.
“It was a volatile day for gilt yields, which ended the day a few basis points higher. Technical factors likely exaggerated the volatility. While gilt yields ended the day higher, they outperformed German Bunds.
“We continue to like gilts. We expect the market to over time shift its attention away from fiscal to the underlying macro drivers, including softening inflation. Tight fiscal policy should weigh on growth and inflation ahead — and over time, we expect the market to price in a lower terminal rate for the Bank of England’s cutting cycle.”
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “The change to CGT is a blow for investors. This could have been worse, with suggestions of a doubling of the rate, but it’s scant consolation for anyone hit with a bigger tax bill.
This doesn’t just affect those who are hit with a far bigger bill, it also makes investment less attractive for newcomers who don’t want to have to get to grips with a new tax risk. Already far fewer people in the UK invest than elsewhere in the world, and this could compound the problem. For existing investors, there’s a danger this will drive investor behaviour, and people will focus on tax considerations, rather than the investments that make the most sense for their circumstances. There’s also a danger they may hoard the assets – possibly until their death.
It comes on top of the slashing of the tax-free allowance over the past couple of years from £12,300 a year in 2022/3 to just £3,000 in the current tax year. Investors also have to cope with the fact that frozen income tax thresholds have pushed more people into higher rate tax – automatically pushing up their capital gains tax rate. A combination of all these things means more people face paying more of this tax.
Talking about things like capital gains tax as ‘wealth taxes’ obscures the fact that many people on average incomes, who’ve invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more, so investors should consider how to protect themselves.
The government has said it’s committed to driving growth and investment in the economy, and investors holding shares in companies are a critical part of this picture – not least because UK retail investors are enthusiastic holders of UK equities: 26.4% of assets managed in the UK are held directly for retail investors. The tax environment should be built to encourage investment for the long term, supporting investment in growing businesses and returns for investors, to boost long-term resilience.
It’s disappointing the government has decided to hike this tax without considering counteracting it with changes to taxes on investors more broadly. It means on top of this new tax blow, they pay 0.5% stamp duty on buying shares, one of the highest rates in the G7. Profits made by the company invested in are subject to corporation tax. UK stocks are often popular for income, but dividend tax allowance has been slashed to £500. Meanwhile, the capital gains tax allowance has been reduced to £3000 for individuals (just £1,500 for Trusts), the lowest rate since 1982.”
Kevin Hindley, Partner and Head of Corporate Tax at Andersen LLP, comments: “Increasing the rate of employers’ national insurance from 13.8% to 15% makes it more expensive for businesses to hire staff and is inconsistent with an agenda for economic growth.
“It should be remembered that employers National Insurance is tax deductible and therefore most companies will only suffer an effective increase of 0.9%, however that will be sufficient to impact corporate investment decisions. ”
On AIM, Abby Glennie, manager of the abrdn UK Smaller Companies Fund, says: “The Government did not quite throw in the hand grenade for AIM entrepreneurs and investors that many expected – and valuations of AIM companies ticked up immediately after the announcement, supported by buying demand. However, inheritance tax (IHT) applied on AIM assets at 20% still makes investing in the market less attractive than previously.
With tax benefits halved, investors will need to be more positive on return prospects to allocate cash to AIM and this could swing allocations towards other areas.
UK smaller companies have been battered by a decade of difficulties – from the collapse of their natural investor base (UK pension funds) to increasing regulation – so now is the time to be looking at how we can support them, not pull the rug out from under them. AIM aligns with the rhetoric on investing in growth and innovation, and the tax cuts on IHT here go against supporting external capital investment in this area.
Ultimately, it is not the companies who are the issue. The quality and growth dynamics remain strong, and very competitive versus listed smaller companies markets globally. The problems are external – and, with the right policy conditions in place, we could really see this area of the stock market thrive.”
Rathbones’ Stuart Chilvers says: “The increase in borrowing is meaningful. Given the amount of information that had been leaked ahead of the Budget, bar a major shock, we had felt that the revisions to the Debt Management Office (DMO) Financing Remit were likely to be the key driver of gilt yields today. On that front, the increase in issuance for the year (£19.2bn in gilts, £3bn in T-Bills) was roughly in line with estimates we had seen. That being said, the increase in allocation to long gilts was unexpected in our opinion and likely explained some of the steepening we saw. The increase in borrowing looking forward is meaningful and we believe is the key driver of moves we have seen since the release of the DMO remit, given the significant increase in borrowing that will be required in the coming years.
In terms of the debt rules, these were in line with what was widely expected given the past week, although we think the fiscal rules being based on the three year as opposed to five year rule is a marginal positive (albeit it does not apply until 2029-30 becomes the third year of the forecast period).”
Rachel Winter, Partner at Killik & Co says: The UK stock market has lost many great companies in recent years. Some have been bought out by overseas buyers who were taking advantage of weak sterling and an out-of-favour-market. Others have moved abroad voluntarily, seeking access to greater numbers of investors and more business-friendly environments. While today’s increase in employer NI contributions is a blow, the freezing of corporation tax rates is welcome news. The FTSE 250, which is a much more UK-focused index than the FTSE 100, has risen during the Budget speech.
Trevor Greetham, Head of Multi Asset, Royal London Asset Management had the following obersvations:
Commenting on Labour’s growth strategy and what it means for investors in the UK:
“Labour’s first budget takes a lot of pain up front, presumably in the hope that stronger growth and easier times will come as the next election approaches. Proposed tax rises of £40bn by the end of the parliament are of the same order of magnitude as the estimated shortfall in government revenues due to Brexit, so this budget can be thought of as a fiscal reckoning that was delayed by the pandemic. Keir Starmer has committed not to explore rejoining the EU Single Market or Customs Union, however, and therefore the government is basing a large part of its growth strategy on rule changes to allow an increase in public investment.
“If all goes to plan, greater political stability and a more productive economy should support UK-listed companies and the commercial property market over a period in which heady global equity valuations and geopolitical uncertainty could prove troublesome for investors.”
Commenting on government debt, bond markets and the need for inflation hedges:
“With the UK’s general government debt to GDP ratio over the 100% mark, much will depend on the willingness of the gilt market to finance increased spending at reasonable rates of interest. In common with other developed economies, it will be hard to avoid a steady increase in debt burdens over the next few decades as population ageing gathers pace, especially if birth rates remain low.
“Bouts of higher-than-expected inflation are likely to be part of the solution to work down debt, as we saw in the post-War period. Long term savers can mitigate this risk by investing directly in commodities like gold and oil as part of a diversified multi asset portfolio.”
Bramwell Blower, UK Public Affairs Manager at Shareaction said: “It’s encouraging to see the Chancellor taking steps today to increase public and private funding for the UK’s clean energy and green infrastructure.
“Government action to boost private investment that supports the UK’s transition to net zero is critical to growing a strong and sustainable economy.
“The Government should now introduce ambitious measures to ensure that private capital is invested responsibly, in the public’s best long-term interests. This includes maintaining a robust Stewardship Code, setting requirements for transparent financial reporting, and reforming fiduciary duty so that our pensions work better for people and planet.”
Rathbones’ Alexandra Jackson says: “The Chancellor has threaded the needle. Equity markets like the budget. Sterling rallied in the immediate aftermath, suggesting the Chancellor has threaded the needle of raising the taxes she needs without spooking investors. Even the AIM market is staging a punchy relief rally – the inheritance tax break has been halved, but this is less onerous than feared. Crucially, it gives certainty to AIM investors – we think after this cut, it’s unlikely this issue will be revisited again this parliament, and should allow the index to return to a more fundamental-driven era. The Rathbone UK Opportunities Fund has 10% of assets invested within the AIM market. In general, small and mid-caps are markedly outperforming large caps, as markets digest the budget.”
Commenting on today’s budget announcement, Shamil Gohil, fixed income portfolio manager at Fidelity International, said: “The gilt market has given back all of its pre-budget morning gains post this afternoon’s speech. While the Chancellor seems to have struck the right balance between higher tax hikes, higher spending and borrowing to invest in the economy, there are question marks around the fiscal headroom, which looks quite tight, both on the net financial debt rule and current budget surplus, even after easing the rules – overspend is certainly higher than the market expected. It helps that she has the backing of the Office of Budget Responsibility (OBR) on growth forecasts, however, it remains to be seen if the Labour government can credibly deliver on their plans, and execution risks remain high. In terms of implications for the Bank of England (BoE), the higher minimum wage is potentially inflationary but the government has committed to a 2% inflation target, which should be reassuring. Investment spending should address the supply side of the economy, and therefore limit the impact on inflation. As an aside, higher taxes could be punitive for the labour market / consumer demand and thus negative for growth. In terms of gilt issuance remit, which is what matters for yields, approximately £20bn more of issuance pencilled in, skewed to the long end, which was not expected and leading to some curve steepening. Overall, I think gilts can continue to perform here and reverse some of their cross-market underperformance, especially as the focus shifts to the US election and associated fiscal expansion there.”
Daniele Antonucci, Chief Investment Officer at Quintet Private Bank (parent of Brown Shipley) reacts:
The broader economic policies that could matter for markets
Right after the election, we argued that a possible strengthening of unions’ bargaining power could impact business activity and confidence while reducing economic flexibility in some sectors. But it could also modestly boost consumers’ buying power. And the planning-system reform could increase housebuilding and productivity, with higher public-sector investment likely to support productivity and economic growth.
Moreover, a tighter relationship with the European Union (EU) could lower some of the Brexit-related administrative costs for some EU-UK transactions and perhaps preserve a higher degree of regulatory alignment between the UK and the EU. That said, higher taxes could lower incentives to invest. And Labour’s pledge to cut net migration could reduce the supply of labour in some sectors already affected by shortages.
Difficult arithmetic to ascertain economic effects
Adding up these positive and negative effects is rather difficult without further details, and the net result looks highly uncertain. Taken at face value, these hypothetical near- and medium-term changes could boost economic growth, at least to a small extent. However, it could cause inflation to rise, especially if the National Living Wage was to increase beyond expectations.
The implications for the Bank of England (BoE) are twofold. First, there’s a risk of slower interest rate cuts if both growth and inflation do rise more than expected. Second, much will depend on the impact of the extra debt issuance on long-term bond yields. If they were to rise because of concerns on the public finances, the BoE might face a dilemma: should they ease financial conditions to mitigate instability, or just focus on inflation and continue to cut at a measured pace?
Sterling at peak strength, we see risks of a slight depreciation
So far, the BoE has been more reluctant to lower interest rates than other major central banks, having only cut by a quarter-percent to 5% in September. For comparison, the US Federal Reserve (Fed) delivered a bigger half-percent cut in September; the European Central Bank (ECB) delivered three cuts, reducing rates by 0.75% in total. In part, this could be explained by somewhat stronger economic growth and stickier inflation in the UK relative to the US and the Eurozone. Importantly, while both the Fed and ECB had conveyed to the markets that further rate reductions were possible and perhaps likely, the BoE’s messaging turned out to be less committed to rate cuts.
In turn, these differences in interest rate expectations, which are a key driver of foreign-exchange flows in the near term, resulted in a stronger pound sterling relative to the US dollar and, to some extent, the euro. With UK inflation now below the 2% central bank target and signs that economic growth is slowing, we think the BoE will catch up with other central banks and likely cut rates again before the end of the year (and several times next year). These dynamics could weaken sterling a bit, at least in the near term, or at least mitigate the risks of further strength.
Our UK equity exposure is currently aligned with our long-term allocation
Our investment strategy is global. We seek opportunities across asset classes and geographies, also attempting to mitigate portfolio volatility by gaining exposure to a wide variety of investments driven by multiple factors. Therefore, a wobble in parts of the portfolio could be mitigated by a gain elsewhere. Given its weight in global markets, our largest absolute exposure is US equities, which captures long-term growth via its quality, depth, dynamism, and themes such as artificial intelligence and technological innovation.
Relative to our long-term strategic asset allocation, our UK equity exposure is currently ‘neutral’. That said, in our flagship sterling portfolios, the neutral point for UK equities is somewhat higher than the weight the UK has in global equities – a strategic change we did about a year ago that has helped us increase our exposure to ‘defensive’ equity sectors (consumer staples, health care and utilities, for example), which are particularly present in the main UK large-capitalisation equity indices and tend to outperform when equity markets become more volatile.
Commenting on today’s budget and the reaction from the gilt market, Chris Arcari, Head of Capital Markets, Hymans Robertson says: “As expected in today’s budget, the Chancellor confirmed the government’s new investment rule will see debt defined as “public sector net financial liabilities”.
“The Chancellor re-committed to meeting the first fiscal rule, that tax minus day-to-day spending be brought into balance. Increases in spending, particularly in health and education, are to be met with £40bn of tax rises, including, but not limited to, increasing employer’s national insurance contributions (£25bn of the £40bn), higher rates of capital gains tax, and bringing pensions with the scope of inheritance tax.
“The tweak to the fiscal rules, with debt defined as public sector net liabilities instead of public sector net debt, paves the way for additional investment over the parliament. With the government set to invest an additional £100bn over the next 5 years as a result of the tweak, we believe they are showing welcome restraint against the c.£50bn p.a of headroom the changes create.
“The OBR has raised near-term growth forecasts and, crucially, as a result of increases to investment, has raised the long-term potential growth forecast for the UK.
“Ten year gilt yields initially fell while the Chancellor spoke but have risen during the opposition’s response. At the time of writing, 10-year yields are up about 0.1% pa on the day. The market will need to recalibrate for materially higher near-term government expenditure and potential rise in business’ labour costs, but we believe the systemic risks to the market are low.”
Hetal Mehta, Head of Economic Research, St. James’s Place said: “Today’s Budget was clearly one of the most highly anticipated fiscal events in memory and it was far-reaching in nature.
“While it was one of the biggest tax-raising budgets of recent decades, it was also one of the biggest fiscal loosening announcements too. The government has got public spending as a share of GDP broadly moving sideways rather than declining as per the previous OBR forecasts and boosted investment so that the overall level of longer-term GDP will be 1.4% higher. However, most of the uplift comes in the next couple of years.
“Given the change to the fiscal rules and the definition of debt, it is surprising to see the fiscal headroom will only increase slightly from the record low of the previous Chancellor. Complying with the rules within a three-year horizon could give some scope for more stimulus ahead of the next election, but that will depend on how the economy performs.
“The OBR’s medium term GDP forecasts still look optimistic particularly relative to those of the Bank of England; next week we will see the new Monetary Policy Report projections. There should be little immediate impact on the Bank of England interest rate decisions but further out with the mix of better growth, to inflation. A modest pace of rate cuts would be appropriate rather than the faster pace that the Fed and ECB are pursuing.”
James Henderson, manager of the Henderson Opportunities Trust, Lowland and Law Debenture investment trusts was relieved to see the chancellor not entirely scrap IHT relief on AIM stocks. He said: “Before the budget people were saying that scrapping BPR would see AIM stocks fall as much as 30%. We still need to see more done to revitalise AIM but the fact that the market actually went up afterwards tells you that the doom had been priced in and that scrapping half the relief is a lot better than many feared. It also has to be put in the context of the imposition of IHT on pensions. Some may take the view that it is better to pay 20% IHT on AIM stocks than perhaps 40% on their pensions.
“In terms of holdings across our investment trusts the fact that capital relief has not disappeared on oil went down well. JG oil and gas is up very substantially on my screen from 33p to 90p. The other thing I’m very pleased about is nothing on gambling as we have holdings in entain and flutter. And the commitment to green hydrogen could be good for our alternative energy holdings within the Henderson Opportunities Trust.”
Shaan Raithatha, Senior Economist at Vanguard Europe, comments on the Autumn budget:“Despite the headline £40bn tax increase, today’s budget was in fact a big fiscal loosening. Government spending, funded roughly 50/50 between tax rises and additional borrowing, will increase by almost £70bn over the next 5 years (2% of UK GDP). This fiscal loosening is the largest of any fiscal event in recent decades. It also implies the size of the state will have increased by around 5 percentage points of GDP by 2030, relative to before the pandemic (2020).
“At the margin, we expect inflation and the Bank of England (BoE) interest rate to fall more slowly as a result of today’s announcement, as stronger growth in the short run exerts upwards pressure on core inflation and the path of BoE policy.
“Although Rachel Reeves changed the definition of debt to public sector net financial liabilities (PSNFL), markets took encouragement in the fact she decided to tighten the two fiscal rules in other ways, most notably by reducing the horizon that the budget and debt ratio needs to stabilise from five years to three years.
“We’ve had some intra-day volatility, however, the market reaction has been fairly muted and at the time of writing, gilt yields have ended up moving in a similar fashion to other European bonds such as German Bunds and French OATs, whilst sterling is little changed against both the US dollar and euro.”
Artemis fixed income manager Liam O’Donnell said: “The market initially took announcements relatively well, considering measures announced were on balance less fiscally conservative. The recent weakness in UK gilts and nervousness appeared to have been partly a Truss risk premium than anything else. If this had been a more fiscally conservative budget you’d have expected gilts to rally further and equities to sell off. The fact that both were doing well in the hours before the budget reflects the nervousness that had been around and that people were closing out bets on the back of the pre-budget leaks.
“In the end the budget was more fiscally supportive than most of us expected. We’re seeing £100bn on investments, no extension of the income tax threshold freeze, no hike in fuel duty and CGT lifted less than was expected. On balance considering how much fiscal headroom she has freed up leaving the government with only £16.7bn of fiscal headroom has been quite a bold move. From the moment Reeves sat down the market began to reprice yields higher and rate cut expectations have been dialled back, as this new budget increases inflationary pressure in an unwelcome development for the BoE.”
Liontrust’s Anthony Cross reflecting on today’s Budget, said: “We are delighted with the chancellor’s clarification on the status of IHT relief on AIM shares. In announcing the 50% IHT relief it recognises the vital role played by this market in the UK’s economic growth and puts the question over its removal to bed for the foreseeable future. Despite the market rallying 4% today, there remains a huge valuation opportunity and upside in investing in AIM – these companies are not valuable because of their tax treatment but because of their underlying fundamentals.
“With interest rates reducing, growth returning, a stable government and this question now resolved, we believe the headwinds that have been plaguing AIM have now turned into tailwinds. Year to date (including today’s move) the FTSE Small Cap Ex-IT is up 11.5% vs AIM down 2.6%, at the very least we would expect this gap to continue to narrow.
“Having said this, we believe that it is vital that the government continues to use policy to support UK capital markets. First, by simplifying ISAs and introducing a requirement for investing a proportion in UK shares. Secondly, using the pension review to re-introduce a UK home bias as seen in so many other markets. Thirdly, the Mansion House Compact should be further clarified to explicitly encourage investment in AIM (as an unlisted UK equity).”
