The pound, gilts and stocks: likely winners and losers from UK budget
By Lucy Raitano, Samuel Indyk and Joice Alves
LONDON (Reuters) – Britain’s City and business lobby are clamouring for sweeteners in Wednesday’s spring budget to replace generous investment relief that is expiring just as corporation tax is due to rise.
Former Prime Minister Liz Truss sealed the short-lived status of her premiership back in September with a fiscally lavish and badly received budget that roiled UK markets.
Jeremy Hunt, the finance minister appointed after that debacle and retained by Truss’ replacement Rishi Sunak, will be careful to avoid a repeat of such chaos, likely keeping major policy changes on hold until the next election moves closer.
Bloomberg reported on Saturday that Hunt will hand businesses a three-year tax break worth 11 billion pounds ($13 billion) by replacing the UK’s investment allowance with a temporary measure.
Hunt, who spent the weekend facilitating the sale of Silicon Valley Bank’s UK arm to HSBC, has pledged support for the UK’s tech sector.
Meanwhile, extremely wide forecasts for new public borrowing requirements make the outlook for government bonds uncertain.
Here are the main budget predictions for UK stocks, gilts and the pound.
By design its going to be quite a tame affair after all the volatility last year,” Jason Simpson, senior fixed income strategist at SPDR, said. Like many in the City, he does not expect any meaningful tax and spending plans until the next election moves closer.
With no big giveaways expected, traders’ main focus is on new public borrowing forecasts, where analysts’ expectations are so wide the final number may move government bonds significantly.
The Office for Budget Responsibility may well upgrade its 2023 GDP forecast after business data showed the UK economy is faring better than feared and GDP data on Friday showed growth was a little better than expected in January.
The OBR forecast in November that Britain’s economy would shrink by 2% in 2023. NatWest is now forecasting 3.7% growth this year.
However NatWest analysts flagged that the OBR will likely revise down growth forecasts for the next five years, making the outlook for interest rates finely balanced.
That may affect sterling, as well as debt-dependent equity sectors like homebuilders and property landlords.
A slightly firmer growth outlook from the OBR for this year may brighten the outlook for sterling slightly, but it should not cause much reaction,” said Jane Foley, head of FX strategy, at Rabobank in London.
Hunt will likely keep the budget “reasonably dull” after Truss’s “mini-budget” sent sterling to its lowest on record, she added.
Sterling and bonds after Mini Budget https://fingfx.thomsonreuters.com/gfx/mkt/lbpgglegdpq/Sterling%20and%20bonds%20after%20Mini%20Budget.png
Borrowing expectations for the 2023/24 financial year are likely to be lower than the indicative estimate from Hunt’s Autumn Statement, with an unusually wide range of estimates for how much they will fall.
The lack of certainty could “engender sharp reactions” in the gilt market, UBS rates strategist Rohan Khanna said.
The UK’s Debt Management Office has projected a 305.1 billion pound ($362.5 billion) gross financing requirement. Forecasts are for this to drop to a range of between 220 billion and 275 billion pounds, Royal London Asset Management fund manager Ben Nicholl said.
According to UBS’ Khanna, a 225-billion pound projection would either generate a rally in gilts, or cause traders to question the feasibility of such a low figure. A number above 275 billion would push yields up, he said.
Meanwhile, extended support for consumers’ energy bills could also weigh on gilts and lead to tighter monetary policy at the margin.
If households are sheltered for longer than expected in terms of energy prices, then they have potentially more disposable income and that could in turn create more persistent inflationary pressures,” Matthew Cady, investment strategist at Brooks Macdonald, said.
DMO Debt Issuance https://fingfx.thomsonreuters.com/gfx/mkt/jnpwyazqmpw/40xMa-british-debt-issuance-soars-since-2008.png
Stock market investors will be looking out for new business-friendly tax offsets as the government tackles a growing trend of companies favouring the U.S. as a listing destination over London.
Chip designer Arm is pursuing a U.S.-only listing while UK construction group CRH recommended moving its primary listing across the Atlantic. Energy giant Shell was said to have considered the same.
“There’s going to be very little in terms of tax bungs (breaks) or spending giveaways,” predicted Patrick Spencer, vice-chair of equities at RW Baird.
But companies have had very attractive tax offsets,” he added. “Hunt’s going to have to do something to replace that.”
Corporation tax is due to rise to 25% and a generous pandemic-era tax saving on business investment known as the “super deduction”, which cuts companies’ taxes by up to 25p for every pound invested, will expire.
Confederation of British Industry economic policy director Louise Hellem is urging the government to avoid the “double whammy” of corporation tax rising and the expiry of the tax super-deduction.
BT Group is among the companies to have said the super-deduction was a significant boost to its bottom line. Investors in UK stocks are already grappling with a wide valuation gap with U.S. equities.
UK valuation gap https://www.reuters.com/graphics/GLOBAL-MARKETS/akveqowajvr/chart.png
If changes to OBR growth forecasts shift views on UK interest rates, expect moves in sectors closely correlated to borrowing costs, which Investec head of UK equities Roger Lee identifies as builders, banks, property landlords and retailers.
Bank stocks tend to get a boost from rising rate expectations, while property shares fall.
Rate hikes’ winners and losers https://www.reuters.com/graphics/BRITAIN-MARKETS/BUDGET/zjpqjyleyvx/Screenshot%202023-03-08%20at%2015.52.09.png
Defence, a focus for equity investors in the last year, with the FTSE 350 index of aerospace and defence names up 32% in the last 12 months, is not expected to get much out of this budget.
“That said, with more flexibility than available in November, throwing the defence department a bone here could prove an easy win for the chancellor,” Michael Field, European equity strategist at Morningstar, said.
Falling house prices and increased affordability may also spell less support for homebuilders, Fielding said.
Cries for heavier windfall taxes on energy companies have subsided as wholesale power prices have dropped. Even if there is a bigger windfall tax, oil majors BP and Shell have relatively limited North Sea exposure that would be affected.
($1 = 0.8258 pounds)
(Reporting by Lucy Raitano, Samuel Indyk, Joice Alves and Naomi Rovnick; Writing by Naomi Rovnick; Editing by Amanda Cooper, Sonali Paul and Nick Macfie)
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