According to Quilter Investors’ latest Investor Trends Survey, fund groups are expecting Labour to have to implement spending cuts at the upcoming Spring Statement in the event fiscal headroom is eliminated. The survey, which was sent to 21 of the leading fund management institutions representing £22 trillion of assets, is carried out on a quarterly basis and covers forecasts for macroeconomic data and timely indicators.
Gilt yields spiked in January, reaching highs not seen since the 2008 financial crisis, as investors digested a number of factors, including a resilient US economy, the policies of a Donald Trump presidency, and the fallout from October’s Budget.
Despite Q4 GDP growth remaining in positive territory, the growth outlook has weakened since the Office for Budget Responsibility’s forecasts in the autumn, meaning the fiscal headroom will continue to be under pressure. This survey showed that forecasts for 2025 GDP growth have slipped to 1.1% from 1.25% in the previous quarter.
Investors predominantly see spending cuts as the only viable option for Chancellor Rachel Reeves. Nearly half (47%) of respondents consider this as the most optimal way forward, while a third (35%) believe spending cuts will be combined with further tax rises. Just 6% of respondents think tax increases alone will be used, suggesting that Labour may have gone far enough for now on tax raising policy.
Meanwhile, the survey also revealed that the new administration in the White House is likely to cause conflicting issues for investors. Unsurprisingly the vast majority of investors (72%) see Trump’s presidency so far as providing more optimism for already strong GDP growth. However, on the flipside, a majority (56%) is also becoming less optimistic about the path for inflation. This will likely result in interest rates having to take somewhat of a pause from the path downwards investors originally hoped for.
However, when it comes to investment returns, the survey found investment groups to still be bullish. 38% are now more optimistic on the performance of the S&P 500 index, with just 19% becoming less optimistic, as investors expect the Trump administration to be business friendly and drive positive earnings growth.
Somewhat conversely, the respondents are also looking at US equity market valuations with some concern. Given a scale of one to five, with one being not concerned at all with valuations, to five having major concerns, investors gave a weighted average of 3.5 – highlighting that there are some nerves there as the S&P 500 continues to trade close to recently set all-time highs.
Participants were also asked about the path of monetary policy, where investors see the potential for considerable divergence from the Bank of England, Federal Reserve and European Central Bank. When asked if monetary policy from those central banks was too loose or too tight, the vast majority saw the Fed getting the balance about right, with the BoE and ECB viewed as continuing to be too restrictive.
| 1 – Too loose | 2 | 3 | 4 | 5 – Too tight | Weighted Average | |
| Bank of England | 0% | 12% | 18% | 41% | 30% | 3.88 |
| Federal Reserve | 0% | 18% | 76% | 6% | 0% | 2.88 |
| ECB | 0% | 0% | 30% | 59% | 12% | 3.82 |
Indeed, the survey respondents expect very minimal cuts in interest rates from the US this year, with nearly a third (31%) expecting to see no change. This contrasts sharply with the UK, where four in ten investors see rates coming down to a range between 3.26% and 3.75%, with just over four in ten (45%) expecting rates to remain at that same level by the end of 2026. For Europe, meanwhile, investors expect rates to drop beneath 2.5% this year, with four in ten indicating they expect to see interest rates in Europe at 2% or less. For the end of 2026, the majority (57%) expect to see the ECB have rates in the range of 1.51%-2%, with some even expecting rates to drop below 1.5%.
Lindsay James, investment strategist at Quilter Investors, said: “The UK economy has continued to face pressures, not only from domestic factors, but also as a result of being buffeted by international events. The reaction to October’s Budget has clearly put a strain on business confidence and investors are rightly questioning where the growth is going to come from. The Spring Statement has taken on a huge amount of importance given the recent moves in gilt yields and cuts to growth forecasts, and Rachel Reeves is quickly running out of room to manoeuvre.
“Clearly investors agree and are expecting some level of spending cuts. But the problems for the UK economy lie deeper than the recent gilt yield moves and will take more than short-term measures to fix. In the meantime, weak business and consumer sentiment may result in further rate cuts from the Bank of England.
“On the surface, the US appears to have very few economic issues. GDP growth remains robust, employment stable and earnings growth is feeding through. But Trump is spoiling for a tariff war, raising concerns about inflation among investors. While investors appear to be more bullish with Trump at the helm, the high valuations of US companies are clearly playing on their minds.
“Europe has already outperformed this year, and with the cocktail of rate cuts, glimmers of improvement in economic data and heady valuations in the US, it is not far-fetched to see that outperformance continue throughout 2025, if, and it is a big if, governments can act decisively. For what was predicted to be the worst performing equity market for this year, the tables have been turned, highlighting the need for diversification even in the age of American dominance.”
