David Cumming, head of UK equities at Newton Investment Management, believes that the UK Government are losing control of their economic growth agenda on financial markets.
“The Chancellor will borrow significantly more than signalled in terms of tax cuts, energy subsidies and higher defence spending without providing a framework to markets on how he plans to stabilise future higher debt levels. In response, financial markets have savaged Sterling and Gilts. This will mean higher industry borrowing costs and increased inflationary pressures from a weak Sterling. In the near-term, these factors will overwhelm the impact of the tax cuts and potential supply-side reforms.
“The Bank of England is also likely to raise rates more sharply than previously anticipated. Despite the market’s negative response to the budget, there seems little option for the government to do anything but ride out the storm and hope the Bank of England can provide a monetary response that will calm markets.
“It is possible markets stabilise from here, after very sharp moves down in Sterling and gilts, while UK equities are now very lowly valued versus history. The fact that over 40% of FTSE 100 are overseas will provide some protection from a weak Sterling while gas prices, one of the key drivers of this crisis, have fallen sharply.
“Finally, post the energy price cap the consumer has more certainty around their fuel bills. Overall a lot of negativity has already been priced in, so it is too late to panic but probably too early to be optimistic.”
Find out more about Newton Investment Management.