UK Budget: Britain’s economy has “turned the corner”

Before we get to the markets, let’s have a quick look at the budget announced today by the UK government.

I would say we got a rather predictable, and sensible, budget from the predictable and sensible pairing of Sunak and Hunt.

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At the heart of the announcement was a £10bn personal tax cut. Hunt funded a 2p cut in national insurance contributions for 27 million workers by targeting the rich “non-doms”, the unpopular oil and gas companies, business-class air travel and vapes (hard to argue with any of those). The art to a popular budget is to tax the things the masses don’t like or can’t afford, and give them concessions in turn. He seems to have done this fairly well today.

He also promised to reform the individual savings account system to “encourage more people to invest in UK assets”. We like this, a lot.

What kind of a budget do you deliver knowing that you aren’t going to be in government this time next year? Labour will claim some of the ideas were theirs, but trying to work out who came up with what first is rather pointless. If it’s a good idea, then whoever is in power should implement it. We could do with more of that.

However, it does seem to have focussed on doing a few things simply so Labour can’t do them when it’s their turn. The Chancellor announced that he will extend the windfall tax on the profits of oil and gas companies by one year.

The Energy Profits Levy was introduced in May 2022 to raise funds to help people who faced soaring energy bills, just as oil and gas companies reaped record earnings. The 35% charge will now expire in 2029, instead of March 2028.

Obviously, this is unpopular with oil energy companies, but it’s popular with everyone else, so it’s always going to be a winner. The danger of such a tax though is that it scares large corporations into thinking that if they make too much money, the government could randomly make up a tax and punish them with it... because that’s what they’ve done.

It will be popular though, and this is their final chance to win over the people of the Britain. Of course, it won’t be enough to turn the tide on the general election, but it does reduce a few things that Kier Starmer can now do in 2025.

Hunt was always going to limited on the promises he could make. Behind the upbeat rhetoric was a sombre backdrop of high tax levels continued pressure on Britain’s creaking public services, which face years of further spending restraint.

It is always important to remember when listening to politicians who promise us more money on services, that we don’t have any more money. We are constantly fighting a battle against debt on a national level. Whatever the government claims is spare, has been borrowed and arguably should go towards clearing a debt level we already can’t afford.

Hunt tried to keep things positive though by saying: “Because we have turned the corner on inflation, we will soon turn the corner on growth”. He added that inflation — which hit 11.1 per cent in October 2022 — would fall below its 2 per cent target in “just a few months’ time, nearly a whole year earlier than previously forecast”.

The Office for Budget Responsibility, the UK’s fiscal affairs watchdog, now says the UK will expand 0.8 per cent this year, up from the 0.7 per cent it forecast in November. The OBR also predicts 1.9 per cent growth in 2025, up from its previous estimate of 1.4 per cent.

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Looking outside the UK

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Aside from today’s budget in the UK, equities in the US lost traction this week after a rally that has spurred concern about sky-high valuations — especially in megacaps, leaving the sector vulnerable to big moves in the face of bad news. Apple’s iPhone woes in China deepened while Advanced MicroDevices hit a US roadblock in selling an artificial-intelligence chip to the Asian nation. And Tesla extended its rout as China shipments slumped.

Bullish positioning in US technology stocks is at the highest in three years — raising the risk of a pullback, according to Citigroup Inc.’s Chris Montagu. Long positioning in Nasdaq 100 futures is “extremely extended,” he said.

“Trees don’t grow to the sky,” said Kenny Polcari at SlateStone Wealth. “What is starting to concern some investors is whether or not some of these tech companies that have gotten stretched can in fact live up to the ‘lofty valuations’ that investors have placed on them.”

Wall Street also weighed data showing the US service sector cooled — even as orders and business activity picked up. Caution prevailed, with Powell heading to Capitol Hill for his semiannual testimony before Congress, where the Federal Reserve chief is expected to reiterate the lack of urgency to cut rates.

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Going down

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The S&P 500 dropped 1%, while the Nasdaq 100 slipped almost twice as much. Tesla extended a two-day sell off to 11%, while Apple suffered its fifth straight loss. Nvidia Corp somehow rose as it seems to do regardless of what’s going on.

Treasury 10-year yields fell six basis points to 4.15%. Bitcoin slid after a record-setting run that topped $69,000. Gold also hit an all-time high.

“The AI frenzy combined with expectations for rate cuts in 2024 renewed ‘bubbly’ investor behaviour,” according to the GMO Asset Allocation team. “If the projected Fed cuts fail to occur or growth companies fail to deliver on aggressive expectations, growth investors will likely wind up disappointed.”

We agree with the sentiment, and while we don’t believe that we are any near bubble territory, we do think there is a chance of a pullback in equities. It doesn’t need to be dramatic, but nothing goes up forever. Economies are holding up and the earnings of the mega tech justifies most of the current valuations of the big players, but that doesn’t mean the bottom can’t fall out from under them.

Left to come this week is a European Central Bank interest rate decision tomorrow as well as Euro Area GDP followed by US non-farm payrolls on Friday.

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