Ben Kumar, Senior Investment Strategist at 7IM gives us his thoughts following today’s budget and what the impact might be on funds under management.
“While the Budget is the most important fiscal event of the year for the UK, it’s always been something of a sideshow given the global exposure of our portfolios. Although very important for our clients’ lives, it tends not to impact the investments we manage on their behalf.
“Normally, the Chancellor uses the Budget to set out some long-term aims. For the second time in a row, Rishi Sunak will have to be a little less focussed on the long term. Essentially, he’s been in firefighting mode ever since he took office, and that’s still the case today.
“From our point of view, the opening of the UK economy this summer is very important, as we think it will be a good template for the rest of the Western world.
“The Budget today is not going to impact the reopening too much – it will be driven by consumer demand as we start to get used to socialising once more. We’re encouraged that the government is doing everything it can not to stand in the way of the recovery, as we’ve seen today.
“Below are what we consider to be the key investment takeaways:
- Growth forecasts and data – No surprises on the bad news, but the good news is happening fast!
- The Office for Budget Responsibility (OBR) estimates that the economy will grow by 4% this year, followed by 7.3% in 2022. These have been boosted following the success of the vaccine roll out.
- These growth rates suggest that the economy will return to its pre-Covid level by the middle of 2022 – a lot sooner than many expected this time a year ago
- 2. Unemployment – It’s quicker to fire than to hire, so this will take time to grind back to normal
- Unemployment is expected to peak at 6.5%, massively down from estimates of 11.9% from July last year. This means 1.8 million fewer people without a job. This will keep the pressure on the government to continue with a pro-growth agenda, into 2022 and beyond. As the service sector opens up, these jobs will return
- 3. Three-part plan to protect individuals – It’s ordinary people who will drive the recovery, so protecting them is exactly the right thing to do.
- The Furlough Scheme will be extended to the end of September. It will pay 80% of wages until July, when employers will be expected to pay 10%, then in August and September, employers will be asked to contribute 20%.
- Support for the self-employed continues with 4thand 5th Support depends on losses to turnover. Total support for self-employed sums to £30bn.
- Universal credit uplift of £20 per week to continue for 6 months
- 4. Total borrowing – The UK isn’t alone in its response to COVID-19, and there’s no better time to borrow than when rates are at historic lows. A plan to cut borrowing can wait until the crisis is over.
- The UK will borrow a peacetime record of £355bn this year, and borrowing will total £234bn in 2021-2022.
- The costs of borrowing are currently low, but the government highlighted their awareness that rates will rise eventually. The sooner we can start reducing the debt pile, the happier they’ll be.
“There are changes announced today which will undoubtedly influence the lives of many people (the Treasury always does a great summary of the detail here), but there is very little impact on our portfolios – as you’d expect from a globally diversified, long-term manager.”