Its first Budget provided the new(ish) Labour government with the opportunity to re-set the UK’s relationship with business, encourage investment in UK assets and shore up its stockmarket. So to what extent has it succeeded in shifting the outlook for UK stockmarkets and making the UK relevant again?
The pre-budget backdrop was not good. Calastone reported that investors withdrew a net £2.71bn from funds in October – a record high, following early selling activity in September. However, the group reports that sell orders dropped 40% overnight as Capital Gains Tax (CGT) hikes took effect on Budget Day. Equally, while UK-focused funds bore the brunt of the selling, every equity fund sector saw outflows.
The UK has been unpopular for some time. Discretionary fund managers have been gradually reducing their weighting in UK assets for more than a decade. Analysis from ARC shows the fall in the weighting in UK assets has accelerated since late 2019, particularly for UK equities.
Equally, where UK assets are held, it said, the exposure is largely through the non-domestic FTSE 100: “So, while the proportion of UK equities remains above that of global indices, the underlying exposure to the UK economy will be more modest.” Changing this long-held distaste for the UK was always likely to be a challenge.
See also: Autumn Budget 2024: Ten key takeaways
The most notable early impact from the Budget has been felt in the AIM market, where the news that the Chancellor would not abandon inheritance tax (IHT) relief completely, but instead levy it at 20%, was welcomed by investors. The AIM market jumped about 4% on the day and has held onto those gains.
But fund managers have mixed opinions as to whether it will change the dial for the AIM market in the longer term.
Some welcome the removal of uncertainty. Jonathan Brown, co-manager on the Invesco Perpetual UK Smaller Companies Investment Trust, said: “The future of the AIM market was at risk if inheritance tax had been imposed in full on AIM shares, which would likely have led to a mass exodus of many of the largest AIM companies to the main market. The new 20% IHT rate on qualifying AIM companies held for two years should remain attractive for individuals looking to mitigate their IHT liabilities – particularly after personal pensions are now being brought into the scope of IHT.”
He believes the government should build on this pool of “patient capital” to support UK smaller companies by extending the relief to all smaller companies and to funds investing in qualifying companies. He said: “The UK smaller company sector is a major driver of UK economic growth and employment yet has seen net outflows from UK smaller company funds each month since August 2021.”
Abby Glennie, manager of the abrdn UK Smaller Companies fund, is not as optimistic. She said: “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… 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.”
Elsewhere, investors found little to get excited about in the Budget. The FTSE Small Cap index initially rose, but then came straight back down; the FTSE Mid-Cap index showed a similar trajectory. The Budget will raise costs for UK businesses.
Brown said the raising of employers’ NI and rise in the minimum wage will “put pressure on employment-heavy sectors such as hospitality and retail which rely on a lot of part-time workers”. She added: “Some of these costs are likely to be passed onto the consumer in higher prices, with the remainder effectively passed on to employees through lower wage increases.”
The one bright spot may be in industries ear-marked as having “the biggest growth potential” as part of the government’s modern industrial strategy. This includes renewable energy companies, plus specific parts of the aerospace, automotive and life sciences sectors.
There was also financial support for research and development in engineering, biotechnology and medical science. Phil Kent, CEO of Gravis, said the Government’s pledges were “somewhat unambitious” given the scale of investment needed to deliver on decarbonisation objectives. However, he is optimistic the 10-year infrastructure strategy – to be published in the spring of 2025 – and ‘Clean Power 2030 Action Plan’ will deliver more detail.
This support did not have any obvious effect on companies involved in these areas. However, neither was there significant movement on the negative side. The government announced an increase in the windfall tax for the oil and gas sector, raising the rate of the Energy Profits Levy from 35% to 38%, and extending it until 31 March 2030 a year later than previously. However, the share prices for BP and Shell proved indifferent.
An acceleration in UK growth would be an important catalyst for UK markets, but here too, the signs were ambiguous, in spite of additional capital investment and higher borrowing. GDP growth is forecast to be 2% in 2025, which is double the Bank of England forecast.
See also: Autumn Budget 2024: AIM company fears ‘overblown’ as 20% inheritance tax applied to junior market
Isabel Albarran, investment officer at Close Brothers Asset Management, said that market pricing for rate cuts has also been scaled back in 2024 and beyond. “Futures are now pricing in one rate cut this year (previously one to two) with rates now expected to be close to 4% in September 2025 (previously c. 3.5%).”
Nevertheless, it is possible to paint a more optimistic picture. Investment in the NHS could raise productivity by bringing workers back to the market, for example, but this potential is difficult to capture in economic forecasts.
There may also be better news on the consumer. Laura Foll, co-manager on the Law Debenture, Lowland and Henderson Opportunities trusts, believes the power of the consumer may be underestimated.
She said: “Something about the UK economy seems to be more resilient than the economists think. I think it’s the consumer. Remember that consumer spending is 60% of GDP, so it’s really the consumer than moves the needle in any one year on what the economy does.
“The consumer has been gradually paying down debt since the financial crisis. Where we are now, the average consumer has neither savings nor debt – this is much better balance sheet than they have been for some time. And we are back in real wage growth. Consumers are in a good position.”
However, while this is plausible, it is unlikely to be enough to convince investors in the short term. There were no rabbits for the UK equity market in this budget, but the Chancellor may just have been happy to avoid any significant market shocks.
