The Budget (for growth)

The Budget delivered by the Chancellor at the end of October was probably the most anticipated in living memory. Fiscal policy (government taxation and spending) was at the very centre of the election campaign and has been in the headlines ever since, so the details were eagerly awaited, although many had been pre-announced or leaked.

Nevertheless, the day did provide some surprises. The increases in certain taxes, including those on capital gains and inheritance, were not by as much as many anticipated. However, the overall tax rises and spending cuts totalling £40 billion made it one of the toughest Budgets on record. It was flagged by the Government as a “Budget for growth”, however the economic growth forecasts provided by the Office for Budget Responsibility (OBR), whilst upgrading expectations for this year and next, did not make exciting reading from now out until 2029.

In my view, it is difficult to see how the measures announced do lead to a vibrant economy over the next five years. Investment in the economy, which will happen, is good, but it takes a long time to pay off. Meanwhile, companies are burdened with increased staff costs through National Insurance contributions, which are likely to be passed on to customers, or lower wage increases for staff or lower profits or some combination of those. Add onto that more restrictive employment legislation and you can see how corporate Britain will be under pressure. All these factors have real world impacts.

The tax burden (tax as a share of Gross Domestic Product, or the whole economy) will be rising to the highest level ever in the next few years. Furthermore, Government borrowing is forecast to be £127 billon this tax year and £27 billion in 2028-29, up from previous forecasts of £87 billion and £39 billion respectively. It’s a fairly tough outlook.

That’s probably enough of the economics.

What did the financial markets do?

The UK equity market has lagged other major regions over the last year, indeed largely since the Brexit referendum, as share prices have reflected the economic outlook, and politics has been a weight on our shoulders. However, that has caused the UK to look cheap by historic and international comparison, which meant that the reaction to the Budget was benign.

10 year Gilt Yield

Source: GUKG10 Index (UK Gilts 10 Yr), Bloomberg 29.12.2023 – 04.11.2024. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

That wasn’t the case in the lead up to or after the Budget for the gilt market. Gilts are bonds issued by the Government as a way of borrowing money, on which they pay interest.

The yield is the price divided by the interest rate expressed as a percentage, meaning the yield goes up when the price goes down and vice versa. The yield may go up for a number of reasons, one being the amount of supply or issuance of gilts expected. As the Government is planning on borrowing a lot of money, yields rose sharply. The chart above shows the yield of gilts that will be repaid in 10 years’ time, often seen as the bellwether of the gilt market, over the course of this year so far.

Again, this has real world ramifications, gilt yields impact on mortgage rates on offer and the cost of bonds issued by companies as well.

Is it all bad news?

No. That’s never the case.

You could argue all the bad news is known now, which it may be, and therefore reflected in the prices on gilts and equities. That could mean they start improving from here, however, given the uncertainty I think some caution is still appropriate.

The US Presidential election

2024 was a year of elections all around the world, with the most impactful being left until the end.

The resurgence of Donald Trump and the Republican Party on election day was quite a surprise in the end and provides them with what they will undoubtedly consider to be a powerful mandate.

It is too early to know exactly what policy measures will be put in place, but on the day after the election, financial markets have decided what the effects are likely to be. US government bonds fell in price (meaning the yield rose) on the back of the view that Trump spending plans will require significant funding, could be inflationary and will lead to interest rates remaining higher for longer as a result. In the same vein, the US dollar was strong against other currencies. The impact would also, in all likelihood, be positive for economic growth in the US, which led to companies whose profitability is related to the domestic economy doing well. This manifested in smaller companies doing well.

In terms of industries, Trump polices are seen to favour fossil fuels, particularly oil, and to be negative for renewable energy, where the share prices of companies globally were under pressure.

Furthermore, foreign policy will be a key area of focus, particularly as it relates to import tariffs, with technology in the spotlight, semiconductors to the fore and a likely negative impact on Europe and China.

Writing this on the day after the election clearly means that little information is actually known, but financial markets have made up their minds and it is difficult to disagree with what they are saying,

However, we now enter a strange period ahead of the 20 January inauguration of President Trump where little will be actually done. However, I have little doubt we will be hearing about plans for the next four years. It’s reasonable to assume there will be volatility in financial markets and, in my view, the moves seen in the few hours afterwards could continue for some time.