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Gamble on growth sees sterling plummet as housebuilders and retailers react favourably to ‘mini-budget’ – AJ Bell

Danni Hewson, AJ Bell financial analyst, comments on the market reaction to Chancellor Kwasi Kwarteng’s ‘mini-budget’ announced today:

“The new Chancellor barely had time to draw breath as he dragged rabbit after rabbit from his newly acquired hat. The big question troubling markets is how on earth he’s going to pay for all these long-eared prizes. The new government is gambling on growth, but markets aren’t overly keen on a gamble if they don’t know they odds. 

“The decision not to present an independent health check on how well the country is placed to fund all this extra borrowing and all these headline grabbing giveaways has sent London markets and sterling tumbling. The pound’s fallen to its lowest level against the dollar since 1985 as big questions are asked about how expensive this gamble might really be.

“There’s plenty in this ‘plan for growth’ that should indeed achieve growth. The scrapping of the planned corporation tax increase might well be incentive enough for firms who had been considering investing elsewhere to plump for Britain. There were also promises to streamline the planning process for big infrastructure projects that often get mired in red tape, the creation of new enterprise zones with a whole host of goodies available to companies that set up shop in these designated areas and lower taxes for those that earn the most.

“Housebuilders and retailers were among the main industry beneficiaries of Kwasi Kwarteng’s mini-budget, with news that provides some relief at a time when the UK enters recession.

“Shares in Taylor Wimpey, Persimmon and Berkeley jumped on confirmation of change to stamp duty and that the Government plans to sell more surplus land for housing.

“The reduction in the cost of purchasing a first home via stamp duty should act as an incentive for more people to get on the housing ladder. That in turn provides the latest stimulus for the property market and gives housebuilders some welcome relief at a time when investors were starting to worry that transaction levels would fall and build costs would keep rising, thereby putting a squeeze on profit margins.

“Retailers will welcome a new VAT-free shopping scheme for international tourists, benefiting the high street, shopping centres and airports. British shopkeepers have been frustrated since the tax-free shopping scheme was withdrawn on 1 January 2021, so to effectively have that reinstated provides a much-needed tailwind just as everything was looking rather gloomy.

“The weak pound acts as an incentive for tourists to choose Britain as a holiday destination as their money should go further, so to soon have VAT-free shopping strengthens the argument to come to these shores. It’s theoretically good news for London West End landlord Shaftesbury, although its shares didn’t budge on the announcement.

“And there will be disappointment from both the retail and hospitality sector that the VAT cut announced was only for tourists. The cost-of-living crisis has sent consumer confidence hurtling down the drain and this was one rabbit they had hoped to see hopping into the all-important golden quarter.”

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