UK equities
29 Oct 2018 | By Richard Buxton

Britain: You’ve been placed on hold

Richard Buxton, head of UK equities at Merian Global Investors and manager of the Merian UK Alpha Fund, weighs up the implications of Budget 2018 for UK companies and the broader economy.

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Given the United Kingdom’s forthcoming departure from the European Union, few of us who follow the Chancellor’s Budget announcement closely were expecting 2018’s offering to be anything other than cautious, and so it came as little surprise that, once again, Philip Hammond has steered away from making any grand gestures.

The unconventional timing of the speech – it was moved from the usual 12:30 slot on a Wednesday, after PMQs, to 15:30 on a Monday – meant that the day’s stock market session had closed when Hammond finished speaking, and so there is little to say about the reaction of the financial markets.

On the basis of today’s announcements though, it feels safe to say that we wouldn’t expect any major shift in market participants’ sentiment as a direct result of the Budget. Sterling was similarly sanguine relative to the US dollar and the euro, being down barely a third of a cent against the former over the day, and scarcely changed against the latter. It is, by extension, hard to imagine that anything in today’s statement will cause the Bank of England’s policymakers to revisit their existing assumptions.

The overriding, and oft-repeated, headline from this most nuanced of Chancellors was that “austerity is coming to an end.” This is not the same as the “austerity is over” message that the Prime Minister might have been keen to convey, but we did nevertheless see numerous indications that the Chancellor is willing to start loosening the nation’s purse strings, while maintaining the fiscal headroom he will need in order to deal with the ramifications in the event that Brexit negotiations result in no deal being agreed between the UK and the EU.

There were a few obvious crowd pleasers among the proverbial rabbits, with the announcement that the Tories’ manifesto pledge to increase the personal income tax allowance to £12,500 per annum, and the higher rate threshold to £50,000 per annum has been brought forward by a year, bound to have widespread appeal.

By the same token, a range of measures to ease the pressure of business rates on small firms, and to support Britain’s highstreets will be popular in a country once unkindly dubbed “a nation of shopkeepers.”

In practice these giveaways have been made possible by slightly more upbeat news emanating from the Office for Budget Responsibility, which marginally improved its forecast for the UK’s economic growth, and reduced its projections for the amount the UK will need to borrow.

Improvements, however small, are of course to be welcomed. But as much of the emerging economic commentary in response to the Budget has pointed out, the gradual opening of the national purse announced today is largely predicated on an assumed “Brexit dividend,” which itself will depend on the UK securing a favourable deal with the EU. Given the proximity of 29th March 2019, perhaps the biggest surprise in today’s speech was how few references there were to this fact.

While the assertion that “Britain is open for business,” combined with the symbolic-feeling announcement that electronic passport gates at Heathrow will shortly be available for use by travellers from a range of countries beyond the EU (to which they have historically been limited) are all welcome gestures, it is clearly still the case that a failure to reach a good deal will inevitably mean a trip back to the drawing board for the nation’s finances.

From an investor’s perspective, I continue to believe that the UK stock market remains attractively priced by comparison with the vast majority of its developed market peers. A heartening poll of nearly 2,000 readers of The Spectator, conducted ahead of the Budget announcement, showed that I am not alone in this belief, with some 66% of respondents stating that they believe now is “a great time” to invest in British companies.

While today’s announcement has limited implications for larger UK businesses, if a good deal with the EU can be struck, it may just be that out-of-favour British businesses can rediscover their previous form. Few of us enjoy listening to hold music; let us hope that we get the answer we’ve been waiting for when the conversation resumes.

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