Premier Miton’s Chief Investment Officer
Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Premier Miton Diversified Fund range, reviews the UK government’s Autumn Statement and what it might mean for investing in the UK.
Mind the gap
It has been clear since the Prime Minister and Chancellor took office that their main economic focus would be on public finances and to start repairing the massive funding gap that we have. The process was kicked off on 17 November in the Autumn Statement with the announcement of £55 billion of tax rises and spending cuts.
The last few weeks have been … something
Since the moment September’s mini-budget speech, delivered by former chancellor Kwasi Kwarteng ended, UK financial markets have been in a nervous state. Politics and economics have been at the top of the agenda.
In times when there is economic and political stress it will be difficult for politicians to prioritise their resolution, they are conflicted, although the economy should come first. This is exacerbated at present with financial markets being focused on the wider economic environment and they are, to a certain extent, actually driving policy, adding another factor to the equation. Everyone is looking for a greater degree of certainty and markets will also want to see prudent economic policy measures from government. We have seen what happens when imprudent policy is announced.
Therefore, the policy measures announced in the Autumn Statement were going to be scrutinised.
The next few years are going to be tough
We are probably already in recession and the Chancellor told us that the economy will shrink by 1.4% next year, before returning to growth the following year. However, the growth in 2024 is only projected to be 1.3%, followed by 2.6% and 2.7% in the following two years. Not exactly a boom!
Part of this is because of the need to repair the country’s finances. It would be all too easy to list some very large numbers on the economy which look bad by historical comparison, but you will have seen them already. But the point is a very important one; the tax burden will be very high for some time, that dampens economic growth because less money is being spent.
Inflation is not going away quickly; it is predicted to average 7.4% next year, the highest of any G7 member (an intergovernmental forum of 7 countries), according to the International Monetary Fund. The cost of living is continuing higher.
Part of the problem is that there is always a lag between measures being announced and them taking effect, in some cases it will be years before the full impact is felt. It is very much a case of short-term pain for long term gain; but we will all feel it to one degree or another.
Should we be pleased or worried?
We all have our personal situation to consider; taxes, savings, investments, mortgage payments etc and the outcome of the budget is probably not going to leave you in the “pleased” camp. However, overall, the policies announced, in my view, at the highest level, are sensible. That is not a political view, it is a practical one. We cannot continue to run such high levels, of increasingly expensive debt, much longer. The financial support provided to economies post the global financial crisis and the pandemic must be addressed and it will be painful.
Is there any good news?
The economic projections provided by the Chancellor could have been a lot worse! The recession is not forecast to be deep or particularly long lasting. Whilst in subsequent years growth will not be exciting, it is growth. There have been many worse outcomes through previous economic cycles.
The policy measures may not be appetising, but they are prudent and, hopefully, can help provide a period of relative calm in politics and financial markets. I think we could all do with that.
Other than that, it is time to tighten our belts, both figuratively and literally.
Should we continue to invest in the UK?
In my view yes! Again!
When I talk to the fund managers who look after our UK equity portfolios at the moment, I am struck by the confidence they have in the companies in which they are investing. It doesn’t matter if they are investing for growth or for income, they are finding many opportunities to invest for the long term and are excited about the prospects. This applies particularly to small and medium sized companies that have been out of favour, as a group, for some time now. It really is quite encouraging.
It is a similar story coming from the bond team. The bond market, both those issued by the government and companies has been under real pressure as interest rates and inflation have risen. But now, they are telling, me there are some very interesting opportunities, particularly in the corporate (company) bond market. Prices have moved significantly lower this year, meaning that more return can be made for relatively less risk, some of it compelling.
Furthermore, domestic investors have been selling UK investments, broadly, since the Brexit referendum. If we see some confidence return to the UK overall, at least some stability, that money may return. That is even more the case for international investors, and with our currency at low levels rarely seen, it makes the potential in the UK even greater for them.
Financial markets look to the future and take into account today. All the economic commentary I have written above is widely known. In our view, the UK stock and bond markets are offering some attractive prospects for the coming years. More importantly though, we are investing in specific companies and bonds, not the whole of the available market, it won’t all be good. But, if we are correct and the UK starts to get more widely favoured, then the UK could be one of the most compelling places to invest. Again, more importantly, we are seeking the best opportunities within that.