J.P. Morgan Fund Manager

UK Equities unlikely to see major headwinds from ‘Last Autumn Statement’

At 12:30 today Philip Hammond gave his first, and as it happens last, Autumn Statement.

Go to the profile of Callum Abbot By Callum Abbot on Nov 23, 2016 0 0

He’s not stepping down but rather abolishing the twice yearly fiscal tinkering in favour of a single full Autumn Budget.

In the immediate aftermath of Brexit, many thought this statement needed to be a shot in the arm to boost a flagging economy struggling in the turmoil of an ‘out vote’ result.

However, the UK economy has been ticking along far better than most had expected which has helped support the domestic stocks in the UK equity market, whilst the weakness in sterling has benefitted the many international earnings in the index. This has meant the Chancellor has not had to rely on the nation’s cheque book to steady the economy but rather announced a “steady-as-she-goes” statement.

This is rather fortunate as the nation’s finances are not in as robust shape as he would like. There is a growing hole in public finances. One issue is public finances have already been undershooting previous targets set by George Osborne. The other is that the Office for Budget Responsibility (OBR) has downgraded its forecasts for UK growth due to Brexit uncertainty, which impacts future tax receipts and increases demand for social support.

The result is that the government finances will not be in surplus by 2019/20, as previously targeted, but rather a return to balance “as soon as is practical”. Debt is expected to peak at 90.2% of GDP in 2017/18 and Government finances are forecast to be £122bn worse off than in the Spring. Although, given the uncertainty of the impact of Brexit, being precise is impossible. This indebtedness is not a disaster as fiscal rules are regularly changed and, although high, borrowing is at a reasonably manageable level.

The net result is a statement that covers a few populist issues such as supporting those that are ‘Just About Managing’ (JAMs) and some spending on infrastructure.

Specifics:

The announcement included an increase in the National Living Wage by 4% to £7.50 in April 2017. This is a negative for companies that employ a large number of low wage staff such as support services, food & drug retailers, general retailers and some travel & leisure companies.

General support for JAMs in the form of a fuel duty freeze, increased child support and an increase in the income tax allowance to £12,500. The chancellor also announced a ban on upfront fees imposed by letting agents in England, which has negatively impacted real estate services companies. The support for JAMs could help support consumer income and therefore be a boost to retailers.

There is a plan to spend £1.4bn to deliver 40,000 new affordable homes. There will be a £2.3bn housing infrastructure fund to help provide 100,000 new homes in high demand areas. These are not going to fundamentally change the massively undersupplied housing market and are unlikely to negatively impact housebuilders too much. However, it is more likely to be positive for construction companies.

A £1.1bn increase in spend on English roads and a £23bn National Productivity Investment fund to spend on innovation and infrastructure over the next 5 years, both of which should be beneficial for companies in the support services and the industrial engineering sectors.

In summary, this is a reasonably neutral Autumn Statement at a sector and company level.No companies will be jumping with joy at its contents but, on the flipside, few companies will face significant challenges, with the real estate services companies being the most aggrieved. At a macro level clearly there is a slowdown in growth and relatedly a worsening in government finances.

In summary, in a slowing and indebted economy, the Chancellor has given himself flexibility whilst maintaining some fiscal discipline.

Negotiations with respect to Brexit are likely to seem more important. Investors will likely benefit from being agile, as we go through this departure process, but there will be opportunities as the market bifurcates into those companies that will benefit and those which will face headwinds.


More on The Autumn Statement announcement


Callum Abbot is portfolio manager of the JPM UK Equity Plus Fund. Read more about the fund:

UK Adviser | UK Asset Managers


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Go to the profile of Callum Abbot

Callum Abbot

Portfolio Manager, JPM UK Equity Plus Fund , J.P. Morgan Asset Management

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