The UK earlier this month unveiled its first Budget since the public’s vote to leave the EU last year. It was a largely uneventful statement, with many of the planned initiatives telegraphed to the press well ahead of the day. In fact, the most controversial element of the Budget was the plan to increase national insurance contributions for the self-employed, a move embarrassingly ditched just a few days later.
What we did see from the Budget was a stronger economy than anticipated, in the aftermath of the vote to leave the EU, with higher tax revenues than previously expected. Growth in 2017 is also set to come in higher than previously forecasted, so tax revenues again should be higher.
While this meant the Chancellor had the possibility of increasing spending, with the dark clouds of Brexit moving ever closer it is understandable why he would want to hold a little back and have the potential to boost spending should the economy falter. This fits in with the previous Chancellor’s stated objective to ‘fix the roof while the sun is shining’.
While the Budget statement makes front page headlines, we have never viewed it as a major market sensitive event. This one was clearly no different. Trying to trade in anticipation of what might be in included in a Budget has always been a foolish game, in our opinion.
However, what we have seen from the Government is a willingness to make Britain more competitive in terms of corporate tax rates. This sends a message to European authorities that the UK is ready to be aggressive if the country does not obtain a fair deal through the upcoming Brexit negotiations.
There are clearly a large number of major challenges to be faced by the UK in these negotiations. There are many examples of trade negotiations taking multiple years to agree, even for countries producing a far less diverse range of goods and services than the UK. A successful agreement in just two years is going to be a huge challenge, if not impossible.
The market seems to have come around to this view, arguably pricing in the high likelihood of a ‘hard’ Brexit. This is reflected in the continuing fall for sterling this year. For investors in UK equities, this is positive for major UK-listed exporters, those with strong overseas earnings. However, it is negative for a number of sectors, such as retailers, which will feel the pressure of rising input costs. We might already be witnessing the first signs of a consumer slowdown, with retail sales growth slowing in both January and February. This is a potential warning that the spending power of consumers is being impacted by the recent jump in inflation.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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CLI00706 Expiry on 29/03/2018