2025 Budget: Market Update
There was plenty of noise in the run up to the 26 November budget, with the Chancellor appearing to set the nation up for manifesto breaking tax hikes. A smoke and mirror approach dominated. Whilst the letter of the manifesto was not broken, Rachel Reeves was strongly criticised for breaking the spirit. There are tax rises in this budget but, for the most part, the impact will be felt a few years out. It is not a growth budget, and winners will be limited to welfare recipients.
Market reaction to the budget has been benign due to the Debt Management Office (responsible for issuing government debt) stating that there will be a push to issue shorter term debt than has been the policy. The muted market response is also due to this being very much a ‘buy now pay later’ budget. Therefore, while the immediate reaction has been that the measure could have been much worse, the can has been kicked down the road. Post the budget, the Office of Budget Responsibility (OBR) stated that UK PLC finances were in a healthier (or less dire) situation than the Chancellor indicated. I will refrain from commenting on this, as it would take me into political territory; however, I am left with a growing concern that tax raising will become a yearly feature of this government’s budget as opposed to the one-off fiscal event stated in the 2024 announcement.
Our UK exposure was reduced prior to the budget; we remain positive towards large cap UK listed companies, reflected in the performance of the FTSE 100. However, I note that many of these companies do not reflect UK GDP growth as they are global businesses with earnings derived overseas. In our view, mid and small UK companies remain cheap on an absolute and historic basis, and this is reflected in the current holdings in portfolios.
In conclusion, most changes introduced by the Budget will not affect you immediately. Our investment approach remains focused on stability and quality, with a preference for funds that are resilient. While the UK media has been dominated by budget news, your portfolio is globally diversified to help manage risk and deliver performance. We continue to monitor developments closely, but we believe that we are well-positioned to navigate the government’s changes.
This commentary was prepared by our Chief Investment Officer, James Calder.
James joined City Asset Management in 2009 and is our Chief Investment Officer, where he is responsible for managing the investment process and chairing the asset allocation, portfolio construction and fund selection committees. He is also a member of the Executive Committee. He has over 25 years’ experience, including roles at Gartmore, BestInvest and Baring Asset Management, and specialises in multi-asset real return investing. Throughout his career, he has been a key mentor for younger analysts and enjoys watching them progress on to their own successful careers.