During the Autumn Budget, Chancellor Rachel Reeves emphasised the need to restimulate the UK economy, stating the only way to create economic growth is to “invest, invest, invest”.
However, the aftermath of the Budget has not proven to immediately uplift the outlook for the UK market. In the past month the FTSE 250 has dropped 1.35%.
While the UK was braced for the worst for the Budget, not all concerns came to complete fruition. The 50% relief on AIM stock tax resulting in a 20% inheritance tax (IHT) on the market were less severe than the market originally expected. Capital gains tax (CGT) rose, but not as much as some anticipated. The biggest sticker shock came for companies as they were faced with an increase of National Insurance to 15%.
The month leading up to the Budget was not one that inspired confidence in the UK equity market. According to data from Calastone, UK equity funds had £988m in outflows during the month, about a third of the loss across all equity markets of £2.7bn.
Despite the rocky month, Brendan Gulston, manager of the WS Gresham House Multi Cap Income fund, believes the knowledge of what the Budget holds will restore some confidence in the UK market.
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“While we were disappointed with the reduction in BPR, resolution provides clarity and an end to speculation, which we believe is a positive step forward and one that should inject some stability back into the UK equity market. The AIM market had priced in an overly pessimistic scenario that did not materialise, catalysing a 4% rise on the day,” Gulston said.
However, Henry Norton, investment manager at Arbuthnot Latham, said the lack of full IHT relief could be a major deterrent for possible investors.
“These changes diminish one of the key attractions for UK investors in the AIM market. Consequently, this will likely lead to reduced investment flows into AIM-listed shares, increasing the cost of capital for AIM businesses,” Norton said.
“This may hinder access to capital for smaller, growing UK firms. However, the long-term driver for AIM shares will be a revival of the UK economy and investor sentiment. Over the past five years, the AIM 100 index has underperformed the FTSE 100, returning -15.37% compared to 33.13%. No amount of tax relief can compensate for the significant performance gap investors have faced.”
While Norton remained cautious on the short-term effects of Reeve’s Budget, he acknowledged that if Reeves’ plan to restimulate was successful, it could have broader positive effects for the UK economy.
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“The Budget aims to foster growth in the UK economy. If Labour can achieve this through increased spending and investment, it will benefit UK stocks. Since the financial crisis, UK GDP growth has lagged behind the US and EU 27. Long-term, improved UK economic competitiveness will drive capital flows more than changes affecting UK taxpayers,” Norton said.
“The risks of this strategy are evident in the UK gilt market; UK 10-year yields have reached one-year highs. According to OBR forecasts, these policies may lead to higher inflation and threaten the UK’s fiscal strength. If economic growth fails to materialise, increased financing costs for UK businesses won’t translate into higher profits.”
As of opening on 11 November, UK gilt yields were at 4.44%. And while markets were pricing in five rate cuts by the end of 2025 from the Bank of England before the Budget, that now sits at three.
Michael Browne, CIO of Martin Currie, said: “This is not a repeat of the Truss ‘mini budget’. For context, the yield moves are still just a third of the 100-basis-point rise seen in yields over the three days that followed Truss’ Budget.
“However, assuming such bond prices are sustained, and rate cuts are indeed curtailed, this construct has the potential to dampen the outlook for domestic-facing equities and lead to a further shallowing of a domestic recovery. However, this will dampen, if not remove the inflationary impact of the Budget as well. Rates cuts will be slower at first but the destination of 2.5% remains our central scenario.”
Despite the Budget announcements, the Bank of England forged ahead with a rate cut on 7 November to 4.75%. The 25 basis point cut came despite the BoE anticipating an inflation increase of 0.5% in the next two years.
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Norton added that removal of some of the “red tape” when it comes to regulation could also play a significant role in pushing forward growth in the UK.
“In the long term, businesses, regardless of their country of operation or listing choice, will perform based on their underlying earnings. The main reason for reduced flows into the UK capital markets has been the stagnant economic performance of the UK, which has adversely affected the earnings growth of UK businesses,” Norton said.
“The impacts of this Budget won’t be evident over the next year; instead, we will see if Rachel’s strategy pays off toward the end of the current government’s term. Labour believes that investment must come not only from businesses but also from government fiscal measures. Whether this approach is correct remains to be seen.”
This story was written by our sister title, Portfolio Adviser
