Please find below our latest investment market commentary, which on this occasion focuses on Wednesday’s Budget statement. We continue to provide regular updates and further investment updates and observations to help support our clients.
Article written by Iain Lightfoot, Managing Director, Armstrong Watson Financial Planning and Wealth Management and Richard Cole, Fund Manager at Future Money Ltd.
In yesterday’s Budget, the Chancellor announced a finance package that can perhaps be characterised as “buy now, pay later”. Despite typically being considered a fiscal hawk, Rishi Sunak announced that the purse strings of government remain wide open, for now. Furlough extended to the end of September, further support for the self-employed, business rate holiday extension and a continuation of the VAT cut for hospitality businesses. Add in the continued generosity of the stamp duty exemptions and the new super-deduction for business investment and we find ourselves with a government who continue to spend as if it is going out of fashion.
With the pandemic and the need to sacrifice the economy in order to save public health, lockdown has been a crucial aspect in our battle with Covid-19, but the damage done has been extraordinary. Consequently, the role of state in helping society back to its feet is crucial. With the success of the vaccine rollout to date, and with the Prime Minister’s roadmap out of lockdown, the route to economic recovery is now clear and the government is going to great lengths to ensure we get going in the right direction.
Clearly, such big spending is only one half of the story, with the question of how to pay the bill the other major aspect. While Mr Sunak is happy to tolerate growing debt for now, his announcements yesterday showed how the fiscal recovery will be addressed in the coming years. Hemmed in by manifesto promises of not rising personal tax rates, and by a reluctance to return to the austerity of the 2010’s, the Chancellor has chosen corporation tax and personal allowances as his main targets. These will ultimately create a significant drag on the economy, but with the pain not to be felt for a couple of years yet, it seems a reasonable solution to balance the needs of an economy now starving for stimulus and a debt pile which will grow to uncomfortable levels.
The emphasis of support now and to tighten later is a message that seems likely to be well received by markets (especially so for those sectors directly benefiting, such as hospitality and house builders). But, as ever, markets focus on multiple factors at once, and with the recent rise in global bond yields, investors have appeared to be more focused on this subject than the Budget over the past 24 hours. Nonetheless the continuation of expansionary fiscal policy that has now been announced is likely to be viewed as beneficial for our economy, once the dust has settled.
With the Conservative-led coalition government of 2010, the great liquidity injection of Quantitative Easing and record low interest rates were relied upon as the primary drivers of the economic recovery. Government spending was to be cut, with austerity leading the way to tight fiscal conditions. While growth was achieved over the following decade it was largely sluggish, especially in comparison with the US, where fiscal conservatism was not pursued. This time around, it appears that a more dynamic economic recovery is being sought. Once again the Bank of England is keeping monetary policy extremely loose, and while tightening will be coming from the government, throughout this year and next fiscal policy will remain extremely loose.
A relatively rapid recovery, therefore, looks to be on the cards, although as the Office for Budget Responsibility points out, there will likely be long term economic scarring from the pandemic. Despite this, the forward looking picture is significantly brighter than our current situation. Such trends should be seen in other economies too. While progress in overcoming the virus differs significantly across regions, it appears likely that economic growth will pick up on a global basis as we move through this year, further enhancing our domestic recovery, with higher international trade.
For markets, therefore, there appears good reason to be optimistic. While investors have arguably already priced in much of the recovery in some areas (such as large US technology companies), in general, valuations appear attractive given the improving outlook for growth prospects. There is currently concern mounting in some areas over a pick-up in inflation, but with such an uptick likely to be limited in size and potentially also limited in duration, our judgement here is that it will not be sufficient to derail the global equity recovery over the medium term. As such, we remain confident that 2021 will be remembered as a time where both markets and the global economy emerged from the Covid recession.
Our philosophy is that no one can predict the peaks and troughs of financial markets with any accuracy and it has always been extraordinarily difficult to time when the best (peaks) and worst (troughs) are. Timing the stock market is extremely difficult, so we believe it is best avoided. Volatility is a part of investing which is why we always take time to understand how much risk any client is prepared to take before investing. We also generally believe in the benefit of diversification of assets to help manage some of the extremes of the markets. Taking a diversified multi-asset approach means that some assets can fair better in different market conditions as they are more defensive assets such as bonds, whereas during periods of growth equities tend to fair better.
Armstrong Watson, in addition to our full range of accountancy services, also have access to fund management expertise from the Future Money asset management team, as well as independent expertise from the wider market. We are able to use this to help provide insight, commentary, advice and support to our financial planning and wealth management clients.
A key aspect of our investment philosophy is that it is time in the market not timing the market, which is usually the best approach.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We believe that for those people who are considering taking financial advice now may be a good time to do so, as following the Budget statement yesterday key and important allowances and reliefs, including in respect of pension planning in particular, remain available.
Please note that the contents are based on the author’s opinion and are not intended as investment advice. Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise and investors may get back less than they invested
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