| The recent UK budget has seen both taxes and government spending increase significantly; this has contrasted with last year’s stated aims of the Chancellor to reform welfare spending and not to increase tax thresholds. Labour Party MPs have, perhaps, forced a more Rayner-esque approach on Rachel Reeves. So, even with the pandemic in recent memory, the UK is seeing higher taxes on “working people”, and on employers, while the welfare bill is rising significantly after the Prime Minister and Chancellor failed to get their MPs to back modest cuts. As a result, The Office of Budget Responsibility (OBR) has downgraded its growth expectations for the rest of this parliament; this is consistent with the despondent mood of British businesses which have been shedding jobs in response to higher minimum wage and national insurance costs. It is not just businesses which are feeling the pinch but wage costs impact, of course, all employers including hospices, churches, care homes and GP surgeries. In addition to this, we are seeing a significant “brain drain”; not just billionaires are leaving.
Growth
For investors wanting to see election promises about going for growth materialise, there is little about which to get excited. The UK and large western European peers face strong competition from the US and emerging markets while being relatively expensive and highly regulated markets.
- Global competition is intensifying: Europe also has to deal with the rapid development of and growing competition from China, India and other emerging markets while lagging the largest developed market’s performance. The US economy has delivered far superior growth compared to Europe this century (and last) which leaves the average American earning around $86k while the average German or British worker makes around $30k less; Europeans on average wages maybe don’t realise that their American counterparts are paid 35%+ a year more than them. Large European democracies have good intentions, no doubt, with their higher taxation and welfare availability than the US but are not so good at making a bigger GDP cake to share nationally, perhaps. Maybe higher taxation deters investment. Higher welfare availability potentially distorts labour markets. Whatever the reasons for European growth lagging the US, it does not seem that the UK, Germany, France or Italy are moving towards their more “capitalist” model.
- Energy policy continues to give UK industry and homes very high costs relative to peers; this hits investment plans, production and the consumer. While subsidising the purchase of electric cars mostly made elsewhere, UK car production is at a multi decade low.
- Attracting foreign capital: The UK has seen the loss significant capital investment projects to other countries with more business friendly taxation systems. London remains a leading global financial centre but faces competition from around the world as well as “AI” impacting service sectors.
- National debt levels are high in the UK, post pandemic, and set to grow. We are promised deficits may be smaller which means the total national debt still grows over this parliament. If inflation falls and interest rates (bond yields) decline, the approximately £100bn annual interest cost facing UK taxpayers can ease. But if growth is lower than hoped and if there is any inflation shock, that interest bill can grow painfully. Currently, the UK borrows around £150bn p.a. while paying two thirds of that away to cover existing debt interest; perhaps not a great inheritance to pass on to future taxpayers. Having said that, the UK fiscal situation may be improving more quickly that G7 peers.
- More positively, Global economic performance remains robust; it is important to keep the bigger picture and context in mind. GDP growth may be sluggish in the UK, Germany and other parts of the world, but we are not in recession. Interest rates are expected to fall here and in the US. Companies are expected to improve their earnings in all regions globally in the next few years.
What does the Budget mean for Investment Strategy?
- The first thing to say about the budget and investment strategy is, be global; the opportunity set we have is bigger than just the UK. At the asset allocation level, we remain positively positioned in our chosen equity exposures, encouraged by a positive global earnings growth outlook.
- Secondly, being active and direct allows us to find many good ideas both in the UK and around the world. We have written recently about how we select stocks globally and find many very interesting ideas. At W1M, our research team finds many interesting ideas with strong prospects, on a three year or longer time horizon, all over the world. The US may have a more pro-business government than the UK but we are able to find investment opportunities both there and here.
Inflation
- Thirdly, while weaker growth not be welcomed by most of us, it can be a positive for gilts (government bonds) if it means inflation is not as strong as it might be and the Bank of England could have a chance to cut interest rates more than currently expected. A record high tax burden is in the end a type of austerity for those impacted; it might dampen consumption and investment plans. The UK labour market is already under massive pressure; even the US is seeing weaker job creation now. If weaker labour markets reduce inflationary pressures, the bond market can benefit. As inflation is generally expected to go down, central banks are expected to be able to cut interest rates and that means bond prices can go up. Having a preference for gilts (UK government bonds) over credit (company issued debt) in our diversified solutions currently could therefore benefit from weaker UK growth now predicted by the OBR if we see, as consensus expects, lower inflation numbers over the next year.
Real Assets & Absolute Return
- Fourthly, while we see a global macro picture with positive earnings growth across regions and the prospect of interest rate cuts in the US and elsewhere, given some concern in markets regarding “AI bubbles” and ongoing tariff war impacts maybe yet to be felt by consumers and in inflation numbers, we diversify with much more than just equities and bonds. Including real assets in portfolios (such as gold, copper, uranium, property) adds both greater diversification, upside potential and a greater degree of inflation resilience to portfolios.
In summary, it is undeniable that all the major economies have to think seriously about how to deal with their long term growth rates, spending, debt, taxation and regulation issues in an increasingly competitive world, but we are not in a UK or global recession. Consensus expects inflation to fall and interest rates to be cut in the next year. Being global, well diversified and active gives investors a wide opportunity set with which to seek consistent returns over the medium to longer run.
Comment
The growth outlook following the Budget on Wednesday doesn’t look too good in the UK. However, markets react differently to economies, and most fund managers nowadays are extremely well diversified by geography and asset. Only higher up the risk scale will you be equity only investors.
The opportunity for growth remains, we are just likely to see more volatility. In the circumstances, for most of us, we just need to remain invested as we are and continue with any regular monthly funding of pensions and investments.
Hopefully global momentum will help the UK economy recover.
With the impact of the additional taxes in the UK over the next few years it’s more important than ever to use your allowances and maximise your tax efficiency where you can.
Have a good weekend.
Steve Speed
28/11/2025 |
