Billed as the “most pro-growth budget for a generation”, attacked with the claim the “hurting isn’t working”…
In a growth-starved environment, with inflation figures stoking fears, today’s budget was awaited in eager anticipation. Aiming to simplify our complex tax system, increase competitiveness and boost domestic industry, the politically astute rhetoric rang loud while bottom-line impacts remained mixed. Most crucially as an investor, how has the budget impacted the outlook for investment?
Growth Alone does not Drive Equity Returns
Much noise has been made over the downgrade of this year’s growth forecast (from 2.1% to 1.7%) but studies carried out to investigate a link between growth and equity returns have come back empty handed. Taking the recession during the early 1990s as an example, during its duration the UK All Share Index increased in value by more than 16%. Furthermore, as I write this article, the FTSE 100 is barely reacting.
Source: Bloomberg. All Share Index return during 1990 -92 Recession.
Outlook for Stock Pickers Remains Buoyant
The government has picked certain sectors for penalty, others for promotion and the budget will impact companies in different ways. Investors and fund managers able to differentiate and exploit this will be well-placed. The following bullet points give a high level overview highlighting some of the discrepancies:
- TOBACCO duty to rise by 2% above inflation,
- BANKS to not benefit from corporate tax cuts,
- OIL companies to fund the ‘fair fuel stabiliser’,
- SMALL R&D heavy companies will benefit from a 200% tax credit this year,
- private AVIATION hit with a levy,
- home CONSTRUCTION firms to benefit from first-time buyer incentives focused on new builds
In addition, Illogical moves may reverse. Consumption remains under pressure (unemployment still near record high levels) but the outperformance of consumer discretionary over consumer staples has reached almost 50% – illogical since spend on luxury goods should be hit the most. Therefore, there are opportunities for high quality companies with pricing power and strong demand for their goods to play catch up.
Source: Bloomberg. S&P Consumer Discretionary outperforming S&P Consumer Staples by almost 50%.
Diversifying into Other Currencies Supported
In reference to the recent tsunami in Japan, the Chancellor mentioned the support the UK has provided and, in doing so, confirmed the UK’s aim of building foreign asset reserves. With countries artificially pushing the value of their currencies down (read: Brazil’s $40bn intervention last year and Chile’s $12bn this year) and others keeping theirs low (read: China’s RMB believed to be 40% undervalued), the upside potential when this eventually ends is great. Stan Fischer, the Governor of the Bank of Israel revealed they “are diversifying into currencies which (they) would never have put in the reserves before”, supported by the Governor of the Bank of Canada with his belief that we will see a “multi-polar” system. Watching sterling’s moves today, the currency is off slightly against the dollar but the real moves will be versus emerging market currencies and over the longer term. Following the lead of Central Banks ‘spreading their wealth’, this form of diversification may be prudent.
Source: Bloomberg. Brazilian Real falling 12% during last year’s $40bn intervention.
Promotion of Alternative Schemes
The tax relief on EIS (Enterprise Investment Schemes) and VCT (Venture Capital Trust) investment will be increased from 20% to 30% next year, offering a substantial opportunity for tax efficient investing. More interesting and less noted is the move to allow larger companies to be eligible for the scheme. This has been claimed to reduce risk. To this, a footnote should be added. Lower risk opportunities may be available but the same level of due diligence is required.
Finally, although not strictly an investment, giving to charity now has financial benefits in addition to goodwill. Those who donate may be granted a 10% discount in their inheritance tax bill. Looks like the government may be targeting not just our wallets but our souls.