As the dust settles on a shock US banking rout, UK equity investors are turning their focus back on the government’s spring budget to gauge how much of a lift — or hit — authorities could offer to local stock market sentiment.
(Bloomberg) — As the dust settles on a shock US banking rout, UK equity investors are turning their focus back on the government’s spring budget to gauge how much of a lift — or hit — authorities could offer to local stock market sentiment.
Banks will likely grab attention, given Chancellor Jeremy Hunt’s preparations for Wednesday’s budget were overshadowed by the collapse of California-based Silicon Valley Bank and the subsequent stock market selloff. But fears of local deposit runs have dissipated since HSBC Holdings Plc purchased SVB’s British subsidiary. Officials and investors also appear unperturbed by this month’s 10% decline in FTSE 350-listed banks — there is no “systemic risk” to the sector, Prime Minister Rishi Sunak said.
UBS Global Wealth Management strategist Caroline Simmons agrees that SVB-style failures are unlikely, because of UK lenders’ relatively diversified customer base and their practice of holding a larger proportion of deposits at the central bank.
“We continue to see potential upside for UK lenders,” Simmons said. “Net interest margins are healthy and may rise from here if the Bank of England increases interest rates a touch further.”
UK’s FTSE 350 fell as much as 0.7% in London, with consumer and commodity stocks declining while defensive equities including health care, telecoms and staples outperformed.
Corporate Tax
While the budget is expected to announce a corporate tax rate increase to 25% from the current 19%, Simmons does not expect this to dent banks or the wider stock market. For one, the increase is well flagged and in any case, should only shave 1-2% off FTSE 100 companies’ earnings. That’s because the majority of these profits are generated outside the UK, she said, “while the lenders, which are more domestically focused, have an offset from a reduced bank levy.”
Mislav Matejka, a strategist at JPMorgan Chase & Co. is another UK equity bull, albeit with a preference for the globally exposed FTSE 100 index, which he notes, carries a 4% dividend yield, one of the highest across developed markets. It also trades at around 10 times forward earnings, a 40% discount to the S&P 500.
Matejka is more cautious on domestic stocks, as rising interest rates, softer house prices and tighter lending standards force consumers to tighten their belts.
Energy Prices
Hunt is not expected to bring sweeping policy changes but already announced an extension of the Energy Price Guarantee — a program to limit households’ costs. That could help sectors exposed to discretionary spending, such as retail, travel and leisure. Fuel duty cuts, as well as a multibillion-pound expansion of free child care, could also benefit consumption.
Such moves to shield consumers from energy price effects are particularly important, as they indirectly feed into the Bank of England’s monetary policy calculations. Economists at Goldman Sachs Inc. said they expect UK inflation to sink below the BOE’s 2% target by end-2023, if the current £2,500 household energy bills cap is extended. That projection is lower than any other in Bloomberg’s survey and sharply below the current inflation rate of 10.1%.
Read: Hunt Has Limited Room for Maneuver on UK Budget: Decision Guide
Shareholders in industrials will be on the lookout to see if Hunt delivers on offering businesses a three-year tax allowance to replace a so-called super-deduction which expires on April 1.
Military Spending
And finally, the budget could provide clues on further military spending plans, after the Ukraine war boosted the defense outlay and sharply lifted shares in the sector. The government has pledged an added £5 billion over this year, though that’s half the level requested by Defense Secretary Ben Wallace.
Still, investors should not count on big stimulus, said Guy Foster, chief strategist at RBC Brewin Dolphin. Ministers “need to be building up dry powder for deployment ahead of a general election,” Foster said in written comments.
Read More: UK Economy Seen Sputtering Below Pre-Pandemic Levels Until 2024
(Add FTSE move in fifth paragraph; energy price cap, childcare plans in Energy Prices section)
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