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WeekWatch -‘Last week, UK Chancellor Jeremy Hunt released his inaugural Autumn Statement’ November 22

WeekWatch -‘Last week, UK Chancellor Jeremy Hunt released his inaugural Autumn Statement’ November 22

Last week, UK Chancellor Jeremy Hunt released his inaugural Autumn Statement, which received a very different reaction to the ‘mini-budget’ of his predecessor.

 

While Kwarteng’s Budget in September had offered tax cuts paid for with borrowing, Hunt instead offered a sobering medium-term picture, with an increased tax burden for the population meeting tightened spending. Many of the tax rises are due to come into force in future years, when it is hoped the UK economy (and UK consumers) will be in a better place to cope with them.

 

From an investment perspective, a couple of notable changes included reducing the Capital Gains Tax allowance from £12,300 to £6,000 in April 2023, and to £3,000 in April 2024, and also reducing the tax-free dividend allowance over the same period (down from £2,000 currently to £1,000 in 2023, and then £500 in April 2024).

 

Hunt would have no doubt crafted the Budget with one eye on the UK’s fiscal reputation, as he sought to hammer home to financial markets that he and Prime Minister Rishi Sunak take fiscal discipline seriously.

 

At the same time, he needed to balance not pushing the UK into a deeper recession, with the need to fill Government coffers (or at least reduce the deficit).

 

Ben Lambert, Portfolio Manager at Ninety One, noted the Budget may have given the Bank of England some breathing room around interest rates, commenting: “While the [Budget] statement wasn’t necessarily headline grabbing, the objective was clearly to balance the roles of fiscal and monetary policy in reducing inflation, and we believe could be a precursor to a more cautious interest rate hiking cycle by the Bank of England.

 

“Market expectations for the peak UK base interest rate had soared to over 6% post the ‘mini-budget’ but has subsequently fallen to around 4.5% today. Initial commentary post the statement suggests the market may begin to factor in an even lower peak, which would imply we’re nearing the end of the rate hiking cycle.”

 

Part of the reason markets reacted relatively calmly to the Budget was that a lot of its content was already known prior to the launch. The FTSE 100 even ended the week up slightly when all was said and done, despite the Office for National Statistics revealing inflation hit 11.1% in October.

The week also saw the US midterm election results more or less finalised. It had already been confirmed that the Democrats would keep their slender lead in the Senate; however, we now know the Republicans have taken control of the House of Representatives.

 

A divided house adds potential risks to US equities. George Brown, Economist at Schroders, notes one risk being a debt ceiling stand-off next year. In 2011, he says, a similar showdown wiped nearly 20% off the S&P 500.

 

However, overall, the result should be seen as a positive for the market. Brown notes: “Our previous analysis shows this outcome ought to be supportive of risk assets. US equities have averaged annual gains of 12.9% when Congress has been split, compared to a more modest increase of 6.7% when a Democratic president has controlled both chambers.”

 

One potential reason why split houses can help markets is that it forces both sides to compromise and moderate some of their more extreme inclinations.

 

Last week, the S&P 500 and tech-heavy NASDAQ Composite retreated by -0.7% and -1.6% respectively, with growth stocks lagging their value-orientated compatriots.

 

A large part of this was the prior week’s lower-than-expected US CPI inflation, which had acted as a springboard for equity markets, causing them to surge on increased optimism that the Federal Reserve would curtail the pace of future interest rate hikes. Markets failed to build on that, however, as data showing weaker industrial output in the US and a significant acceleration in UK inflation reminded investors of the fragile global economic state.

 

This a reminder of the importance of the phrase ‘time in the market, not timing the market’.

 

Ninety One and Schroders are fund managers for St. James’s Place.

 

 

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