WeeklyWatch – Market turmoil amid UK Chancellor’s tax cuts

27 September 2022

Stock Take

Not-so-mini budget

The new UK Chancellor, Kwasi Kwarteng, delivered a ‘mini budget’ of tax cuts on Friday – a controversial drive, with a vow that there’s “more to come”.

Kwarteng’s series of reforms and changes – which have already brought about a marked movement in the UK market – are said to be the biggest tax cuts in 50 years, making the ‘mini’ description all the more inaccurate.

The fundamental changes included scrapping the 45% Additional Rate of Income Tax, bringing forward the 1p cut to the basic rate of Income Tax, lifting the threshold for Stamp Duty, and removing the cap on banker’s bonuses – in addition to the already announced £2,500 fuel cap freeze.

Payment for these cuts will see the government borrow more heavily than previously anticipated. Kwarteng’s strategy of reducing the debt burden as a percentage of GDP is risky – yet he hopes his policies will encourage investment, grow productivity and spur faster GDP growth.

Sterling and government bonds sold off heavily in response to the announcements, signalling investor jitters over the future state of the UK economy.

Earlier in September, Sterling was trading at a four-decade low of just over $1.13. However, by the start of yesterday, it had dropped to its lowest-ever level of just $1.04.

Paul Dales, Chief UK Economist at Capital Economics, explained:

“Markets have concluded that the result [of Kwarteng’s plan] is likely to be higher inflation and higher interest rates rather than a sustained period of much faster GDP growth. We agree.”

The currency effect

A weak currency can have a multifaceted impact, affecting your portfolio in a variety of ways. Not only does it make imports more expensive and exports cheaper, but – depending on where their supply chains and revenue streams are located – it can also impact businesses differently.

Currency markets are just one factor of many that drive returns, and are renowned as being unpredictable. Having a diversified investment portfolio over the long term can mitigate against currency risk.

Azad Zangana, Senior European Economist and Strategist at Schroders, commented that the ‘mini budget’ put the Bank of England in a tricky position, and that, as a result, future interest rate hikes were now likely to be higher.

“Although the Energy Price Guarantee measure helps lower headline inflation next year by some three percentage points by our estimates, the giveaways, particularly for households, are likely to raise inflation at the end of 2023 and beyond.”

As part of tackling inflation, the BoE itself had already raised the Central Interest Rate by another 0.5% earlier in the week. Delayed due to the Queen’s passing, this move means the rate of 2.25% is now at its highest level since 2008.

The Bank further warned that the UK economy may be under stress, having shrunk between April and June. If the UK economy shrinks between July and September as the Bank predicts, this would put the UK in a recession.

A tough week for markets

UK equity markets had an unsurprisingly challenging week, with the FTSE 100 falling by 3%, and the more domestically focused FTSE 250 slumping by 4.4%.

In the US, the NASDAQ and S&P 500 dropped by 5.1% and 4.7% respectively. This followed on from the Federal Reserve raising its Central Rate by 0.75% for the third consecutive policy meeting. The Fed has taken a notably militant stance lately, with its Chair discussing how rates still have ‘a way to go’ and committing to taking action ‘until the job is done.’

Meanwhile, in Europe, the MSCI Europe ex. UK Index fell 4.3%, as Russian President Putin declared a ‘partial’ mobilisation of Russian men – a move likely to perpetuate the war in Ukraine.

Mark Dowding, Chief Investment Officer at BlueBay, noted:

“Meetings with EU policy makers this week suggest a sense of economic realism in Brussels. There is a sense that recession is a price to pay when there is war on the continent. The question now is how painful this recession will be, and this may be a function of how persistent inflation is, as rising prices imply a material contraction on real disposal incomes.”

Wealth Check

Long-term care for the elderly can be thought of as only being relevant to older people in need of care and their children, who are likely to be in their 50s or 60s themselves.

However, people of all ages in a family can be significantly affected – particularly because the high costs involved can start to erode any inheritance that an elderly person might wish to pass on to younger family members – all the more so if the person suffers from Alzheimer’s or another form of dementia, as this can see care costs rocket.

Planning for a longer life

Tony Clark, Senior Propositions Manager at St. James’s Place, notes that one of the key issues to tackle is that people are now living for longer.

Firstly, one of the consequences is that the age at which people might receive an inheritance is changing. Despite the fact it tends to happen later in life, some older people are now contemplating where those assets can be of most use within a family, and are therefore opting to skip a generation by passing their wealth directly to grandchildren.

Secondly, many of us who do live for longer will be more likely to need care in future – possibly to the age of 100 and beyond.

“The result is that without careful thought and planning, care fees could completely erode all of those intentions of passing down an inheritance.”

Clark observes that the result of all this is that people should ultimately begin planning for a variety of scenarios earlier on in their lives – and, wherever possible, from an intergenerational point of view.

“There are so many moving parts that the planning needs to come sooner than people might have previously anticipated – even though the outcomes and the actions might come later than before.”

In the Picture

Protection insurance policies can help you cover the bills and give you financial peace of mind in the event of illness, an accident or death. What’s more, many policies go even further – offering all sorts of additional benefits.

The Last Word

“May flights of Angels sing thee to thy rest.”

– The Royal Family pay their respects to the late Queen Elizabeth II.

The information contained is correct as at the date of the article.

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

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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