Zach on UK Economy

July, 2020

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The “mini budget” and the more personal impact on our portfolio managers

On Wednesday, Rishi Sunak (or “dishy” Rishi as my mum calls him) announced a “mini” (£30bn) budget as part of the government’s coronavirus recovery plan.

The continuation of the “whatever it takes” messaging should be taken as a positive when considering the outlook for the UK economy. The creativity that the Chancellor is demonstrating in his schemes is also reassuring to see.

Savings rates have spiked during this crisis and increasing the velocity of money is of the utmost importance – both for the survival of many businesses and therefore unemployment. If the Chancellor can create a virtuous cycle of more spending, this would help more businesses to survive and therefore lead to less unemployment. With less unemployment, consumers are more inclined to spend and therefore this would be a pathway to minimise the economic fallout from COVID-19. Hopefully Rishi’s deft touch will prove more efficient than just throwing money at the problem with helicopter payments.

Below we assess the impact of the support measures announced and its impacts on some of the sectors in the UK.  We also highlight the personal impact on some of our UK equity portfolio managers.

Mini budget: What? Why? Winners?

  1. Housebuilders (and mortgage providers?)
    • What? A stamp duty holiday on the first £500k of properties (a max 15k saving for the buyer).
    • Why? This will hopefully benefit all housebuilders by getting the housing market moving again.
    • Winners? Housebuilders with higher average selling prices (Berkeley and Countryside Properties) and brick producers (Forterra).
    • UK Core winner? Callum Abbot. He might finally be able to get off Old Kent Road in his ongoing game of monopoly.

Our view: we are positive on housebuilders due to their returns on capital, strong cash flow generation and attractive valuations. They have the support of an undersupply of housing in the UK which should provide them with structural growth into the medium term.

  1. Hospitality industry double whammy
    • What? VAT on food, accommodation and attractions will be cut from 20% to 5%.
    • What? “Eat Out to Help Out” discount which will provide government funded discounts to consumers from Monday to Wednesday.
    • Why? By increasing the velocity of money in the industry it aims to keep people in jobs and businesses liquid.
    • Winners? Pubs (Mitchells and Butlers… the Hack & Hop?), Hoteliers, attractions (Hollywood Bowl).
    • UK Core loser? Will Meadon’s waistline and wallet. The “spend more to save more” policy will be enforced by his children this August.

Our view: this remains a challenging environment for anybody in the hospitality industry. Encouraging people to get out and spend is an uphill battle as consumers remain nervous about COVID-19 and their personal finances. This is reflected in the depressed valuations in the sector and value opportunities will present themselves in companies that can adapt and have limited balance sheet risk.  

  1. Retailers
    • What? £9bn bonus program to encourage employers to keep staff on into 2021.
    • Why? By keeping unemployment levels in check then hopefully consumer confidence and spending won’t suffer as much.
    • Winners? Any beneficiary of the UK consumer but namely the high street (WH Smith, Dunelm, Next, JD Sports).
    • UK Core winner? James Illsley. Less chance of his favourite clothing brand, M&S, closing his local store.

Our view: In retail we think that the challenges the industry face have been accentuated by this crisis and this will continue despite government support. We favour the retail names with a strong brand, differentiated product offering and good online platform.

  1. Building materials
    • What? Vouchers of up to £5000 for energy saving home improvements.
    • Why? This helps the green agenda as well as encouraging people to spend and keep people in jobs.
    • Winners? Building merchants (Travis Perkins, Grafton).
    • UK Core winner? Anthony. Now he has honed his DIY plumbing skills, he can focus on insulating next.

Our view: we are incrementally positive on home improvements and construction companies in the UK. Valuations look attractive given the spending in these areas from both consumers (looking to improve their homes as they spend more time in them) and the government (stimulating the economy through infrastructure spend).

There has been some criticism around the lack of stimulus announced at this “mini” budget but I think it is prudent. Between now and the autumn budget/spending review the UK has a lot of challenges to face but by the autumn there should also be greater clarity on where the pain caused by COVID-19 is being most acutely felt.

SchemeMax cost
Job retention bonus£9.4bn
Infrastructure spending£5.6bn
Hospitality VAT cut£4.1bn
Stamp duty holiday£3.8bn
Kickstart program£2.1bn
Green homes grant£2.0bn
Skill and apprenticeships£1.6bn
Public sector green spend£1.1bn
Eat out to help out£0.5bn
 £30.2bn
Table 1: Source: Bloomberg

For Professional Clients/ Qualified Investors only – not for Retail use or distribution.

This is a marketing communication and as such the views contained herein are not to be taken as advice or a recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and investors may not get back the full amount invested. Past performance and yield are not a reliable indicator of current and future results. There is no guarantee that any forecast made will come to pass. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. This communication is issued in the UK by JPMorgan Asset Management (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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