The last piece I wrote in reaction to Chancellor Philip Hammond’s bi-annual moment in the spotlight, back in November 2016, began as follows:
“The reaction of financial markets to the new Chancellor’s first, and last, Autumn Statement pretty much says it all; big surprises were conspicuously absent, but longer-term challenges remain.”
The truth is – aside from the fact that the matter now under consideration is Hammond’s ‘first and last’ Spring Budget, rather than the Autumn Statement – that much the same could be said of his latest effort.
The market reaction in the immediate aftermath of the speech was, again, muted; Gilt yields rose a tiny bit (in other words, prices fell), sterling weakened a little relative to other major currencies, and equity markets edged up slightly. It was all, unsurprisingly, very unremarkable.
The Chancellor seemed to be enjoying himself as he spoke, with numerous quips at the Opposition front benches. Superficially, his optimism seems justifiable, with the short-term economic picture looking rosier than had been the case back in November, even if the medium-term forecasts for GDP growth are largely unchanged.
From an investor’s perspective however, what was unsaid and unwritten in Budget 2017 is of as much interest as what was revealed. Judging by a basic analysis of the history of the length of the Red Book (the official document setting out the Budget), we can deduce that Hammond is determined to keep his cards close to his chest. This was comfortably the shortest Budget in recent history.
The ‘Red Book’ is a decidedly pithier read under Hammond than under his predecessor
Figure 1: Historic number of pages in the “Red Book”. Source: OMGI, March 2017
There was a brief – and predictable – reference to the Government’s determination to reduce the UK’s deficit, and a similar commitment rigorously to avoid making any unfunded spending commitments.
Although the spending measures announced today are essentially front-loaded (in the sense that the offsetting reduction in tax relief on dividends, for example, will take some time to feed through), what this means in practice is that Hammond is giving himself more fiscal headroom; he knows that in reality, the months and years ahead could well be far from plain sailing.
Actual references to the UK’s departure from the European Union were few and far between, with the Chancellor toeing the party line and giving nothing further away in terms of the UK’s negotiating stance with its European partners.
While there was more colour on some of the spending initiatives announced at the Autumn Statement, on large areas of policy – from rules governing banks, to sin taxes on alcohol, tobacco and gambling – there was little, if anything, new. Indeed, absent a Brexit, it is hard not to imagine that there might well have been a good deal more giveaways from a Chancellor who makes no secret of his enthusiasm for a spreadsheet.
As far as UK equity investors are concerned, my view is that Budget 2017 changes very little. As and when the government formally triggers Article 50 and the complicated Brexit process begins in earnest there may well be choppy waters ahead, even if that is not what we saw in the market’s immediate reaction to today’s announcements. If, and when, more challenging market conditions do present themselves, it will be those investors who are bold enough to put more money to work when the markets are at attractive valuations who will fare the best.
About the author:
Richard Buxton joined Old Mutual as Head of UK Equities in June 2013, and was appointed as Chief Executive in August 2015. He was previously at Schroders, where he managed the Schroder UK Alpha Plus Fund for over 10 years. Prior to Schroders he spent over decade at Baring Asset Management, having commenced his investment career in 1985 at Brown Shipley Asset Management. Richard was awarded the Outstanding Contribution to the Industry Honour at the Morningstar OBSR Awards in 2012 and has a degree in English Language and Literature, Oxford University.
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