After enduring a long year of lockdowns and daily press briefings, we find ourselves with an economy 10% smaller and a national debt burden substantially larger. It will no doubt have brought reassurance to individuals and businesses across the country to hear the latest round of fiscal stimulus measures announced in the Chancellor’s Budget. Here are three reasons the UK equity market stands to benefit.
Businesses in the retail and hospitality sector will be pleased to have been afforded the security of having the furlough scheme extended out to September, providing insurance against longer-than-expected lockdowns. Moreover, the extension and tapered unwinding of the business rates holiday will bring welcome relief, and many will hope it precedes broader reassessment of the rates regime. A whole host of retailers, from Next to Dunelm to Dixons Carphone could reap the rewards. The extended VAT cut for hospitality (to 5% until September and then 12.5% until next March) will also be a useful helping hand to those businesses hoping to open fully this summer, including the likes of Mitchells & Butlers.
The Budget contained more help for the housebuilding sector too. An extension of the stamp duty exemption for properties under £500,000 until the end of June (and subsequently £250,000 until September) in addition to a government guarantee on low-deposit mortgages for first-time buyers should provide continued impetus for the solid demand demonstrated in the housing market coming into 2021. Housebuilders with higher average selling prices – Berkeley and Countryside for instance – perhaps benefit most.
Of course, this does not come for free. With government borrowing estimated at an astronomical £355bn this year (c.17% of GDP) and £234bn next year, the Chancellor has laid out plans to rein in the public finances with a rise in the corporation tax rate to 25% (from 19%) in 2023 and a freeze in personal tax thresholds until 2026. Crucially, a distinction was made between investment and ‘current’ or day-to-day spending, with the former an attractive proposition in a low interest rate environment. Private investment clearly has an important role in this regard, and one policy that caught the eye was the ‘super deduction’, a super-charged tax incentive for business investment. We think policies such as these could create an environment in which the UK recoups the lost years of investment since the Brexit referendum and ultimately excels. Companies with strong balance sheets and large cash balances are likely to lead the charge.
We have reached a point where a few glimmers of light at the end of this long tunnel are beginning to emerge. With over 20 million people vaccinated with their first shot, and the Budget providing much-needed support for businesses across the country, the future is starting to look brighter for UK equities.
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