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In our Market Outlook series, Marlborough's Chief Investment Officer Sheldon MacDonald discusses global events and shares his thoughts on how they impact markets.
Budget 2024: Update from our CIO
[00:00:00] Sheldon MacDonald: It's budget day today, so that means a special edition of our regular podcast.
[00:00:06] Sheldon MacDonald: I'm joined today by James Athey, head of our bonds team, and also by Edward Kennedy, who's heading up our brand new personal portfolio service.
[00:00:18] Sheldon MacDonald: James, let's start with you on the fixed income side. Give us the headlines from the budget today.
[00:00:24] James Athey: Yeah, Sheldon, Rachel Reeves, the Chancellor, had done a pretty good job in the last few days of, you know, leaking sufficient detail to manage expectations going into this budget event. So in the end, we haven't had too many massive surprises.
[00:00:38] James Athey: Obviously, we all knew about this 40 billion black hole, which had been bequeathed to the Labour government by the Tory party, and so much of the Chancellor's words today were spent describing how that hole would be filled.
[00:00:53] James Athey: So that means lots of revenue raising measures, many of those adding up to a few billion here or there.
[00:01:00] James Athey: Really the main change, the main revenue raising measure was to increase income. employer contributions for national insurance and indeed lower the threshold at which those national insurance payments are made.
[00:01:14] James Athey: The Chancellor believes that that will raise around 25 billion per year, that's about 5 billion more than was expected from that change.
[00:01:23] James Athey: Beyond that, as I say, some adjustments here and there to other taxes which they hope will add up to the additional 15 billion that closes that hole.
[00:01:34] James Athey: On the other side, we'd heard lots about Investing to improve UK growth over the long term.
[00:01:42] James Athey: We had very little detail on that side of things and so I would say on the spending side and indeed the growth side, there are probably more questions than answers.
[00:01:52] James Athey: What we did here was a promise to increase capital spending by a hundred billion pounds over five years, but again, with no specifics as to what that money will be spent on.
[00:02:04] James Athey: There was increased funding for the NHS of around twenty two billion pounds, and indeed there was more funding for both education and defence, obviously very popular political issues, very relevant political issues on the defense side going forward.
[00:02:20] James Athey: But ultimately, if you look at the OBR growth forecasts, while they have increased their growth forecast for 2025, for the years beyond that, we've actually seen a decline in expected GDP growth in the UK.
[00:02:36] James Athey: And so very much, it remains the case that we need to be convinced in terms of really improving the long term growth outlook for the UK.
[00:02:46] Sheldon MacDonald: Of course, the question on everybody's lips will be, well, what does it mean for markets? What does it mean for my investments?
[00:02:52] Sheldon MacDonald: Now, prior to this call, James, you and I were speaking, you said how this might have bought some credibility, but on the other hand, at the moment, actually bond yields not reacting all that well.
[00:03:03] James Athey: No, I think that's right. I mean, we'd seen a bit of a rally this morning in the gilt market, so yields had fallen by around 10 basis points. And of course, in the weeks leading up to today, we'd seen actually a significant increase in guilt yields.
[00:03:18] James Athey: I think largely because of things which were going on, particularly in the US where we've seen the economy continuing to outperform and indeed the potential for a new president who might , cut taxes, and therefore further boost the US economy.
[00:03:33] James Athey: So the starting point was that there appeared to be a reasonable amount of bad news in the price from a gilt investor perspective, and as Chancellor Reeves went through the details, the guilt market seemed to take the numbers in their stride.
[00:03:46] James Athey: But as we got to the end and saw the remit from the Debt Management Office, specifying how much additional borrowing would be required, we saw the guilt market turnaround and yields increase and that's because the borrowing numbers were above expectations, over 140 billion pounds of additional borrowing over the next five years with 40 of that in this financial year.
[00:04:12] James Athey: And indeed the makeup of that guilt supply, so the tenors, the maturities of gilts that will be supplied to the market was also a surprise.
[00:04:21] James Athey: The market had been expecting the DMO to lean more heavily on shorter dated gilts, in fact, they did the opposite and have increased supply of long dated gilts.
[00:04:31] James Athey: And that additional duration, that additional interest rate risk, which the market needs to take down has been taken a bit negatively, and that's why we've seen yields reverse this morning's decline and actually increase a little bit on the day.
[00:04:45] Sheldon MacDonald: Although you're a bond specialist, your take on what's happening on the equity side?
[00:04:50] James Athey: Yeah, so the FTSE 100, which is obviously the benchmark index, the one that most people follow, it's not necessarily a great indicator for things that are happening in the UK.
[00:04:59] James Athey: The composition of that index is not well balanced. There are a lot of commodity firms, a lot of financial firms, and indeed the revenues sourced by those companies tend to be very global in nature.
[00:05:12] James Athey: But if you look at the FTSE 250, which is much more domestically focused, you can see there's been a significant increase in equity prices.
[00:05:20] James Athey: I think that's less about any excitement about UK growth going forward and more the fact that some of the more pernicious tax changes, which had been discussed and debated, didn't come to pass in the event.
[00:05:34] Sheldon MacDonald: Eddie, let's turn to you. From the equity portfolio manager's perspective, what is your takeaway from this budget?
[00:05:41] Edward Kennedy: Hi Sheldon, it's great to be here. What we've seen is really selled rumoured by the facts. We've seen from one media outlet that there was a selling frenzy of UK stocks prior to the budget, and actual Rachel Reeves maybe calmed some nerves.
[00:05:56] Edward Kennedy: To James's point, the FTSE 100 is not really our indicator of the UK economy, it's more internationally based with around 80 percent in non sterling revenue. However, what we did see is domestic stocks outperform international stocks within the FTSE 100 large cap, and we also saw those smaller cap AIM stocks outperform as well.
[00:06:23] Sheldon MacDonald: Yes, in particular the AIM market has done really well. There were fears, obviously, that some of the tax breaks available on AIM stocks would be abolished. There's been a partial abolition of that, but markets reacting really positively on that front.
[00:06:38] Edward Kennedy: Yeah, again, it was one of those ones. People were getting into the budget concerned of what's going to happen.
[00:06:45] Edward Kennedy: But the longer Rachel Reeves actually talked, the more the AIM market rallied, at one point, it was up near 4%, so it was a really good day for the AIM stocks.
[00:06:56] Sheldon MacDonald: Yes, and of course, our portfolio managers who run small cap funds are always at pains to point out that they're buying these stocks not because of the tax breaks, but because of their long term potential, because of the fundamental value inherent in these stocks and the stock prices.
[00:07:11] Sheldon MacDonald: And also perhaps that they might be driven more by what happens on the monetary side, so on the interest rate side than on the fiscal side.
[00:07:19] Sheldon MacDonald: James, your perspective on the interest rate side, any changes in expectations for declines in rates?
[00:07:26] James Athey: Yeah, I mean, ultimately, Sheldon, it's very much going to boil down to what the Bank of England thinks in terms of where bond yields go over the medium term.
[00:07:35] James Athey: I think based on what we've heard today, it's unlikely that we'll see a significant shift from the Bank of England, as I say, in the near term, you know, the outcome was relatively in line with expectations, significant revenue raising measures, but also significant guilt supply increase.
[00:07:51] James Athey: Longer term, while there is this promise to invest for growth, the details are sorely lacking, it will be difficult for the bank to really assess those given what we know today.
[00:08:01] James Athey: So our view has been that we're on this path of disinflation, and that will allow the Bank of England to ease policy, to prevent an overtightening, to prevent an unnecessary slowing of the economy, and really we haven't heard anything today, which I think will dramatically shift the Bank of England from that path.
[00:08:21] James Athey: And so, our view is unchanged really with respect to monetary policy. And we should expect to see interest rates fall over the next year or so.
[00:08:30] Sheldon MacDonald: And Eddie, your outlook on equities from here?
[00:08:33] Edward Kennedy: Yeah, not much different from what James has already said, there's two things certain in this world, and it's death and taxes.
[00:08:40] Edward Kennedy: I think what we really focus on, and it's points you touch upon, is good stock selection, and we believe over the longer term, that will drive compounded returns for clients to help them meet their goals.
[00:08:51] Sheldon MacDonald: Well, let's wrap it up there for now.
[00:08:53] Sheldon MacDonald: There's obviously lots to unpack, lots of reading, lots of commentary for us to look at on the budget and its implications.
[00:08:59] Sheldon MacDonald: If you'd like to see further in depth views from us and our portfolio managers, please have a look at our website.
[00:09:05] Sheldon MacDonald: Other than that, we look forward to speaking to you again next time.