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No surprises

26 March 2015

The consensus amongst fund managers for St. James’s Place is that last week’s Budget was solid rather than spectacular.

With only 42 days to go before the general election, Chancellor George Osborne last week duly delivered a Budget Statement designed to appeal to the savers, pensioners and first-time buyers of Middle England. The City had not expected any major surprises, and was not disappointed.  Although the FTSE 100 index gained on the day, most of this occurred before Mr Osborne had addressed the Commons.

“Overall, the Budget, being so close to the election, was designed to reinforce the government’s economic management credentials. In our view, its effect will be seen as solid and reassuring rather than spectacular”, observed Adrian Frost of Artemis.

George Luckraft of AXA Framlington, echoed these views. “As expected, the Budget was highly political in an attempt to spike Labour’s guns and to trumpet the coalition’s economic success.  There were changes to the savings background, with greater ISA flexibility and a new Help to Buy ISA, access to annuities, a £1,000 interest tax-free band and, less welcome, a reduction to the pensions lifetime allowance. Most measures were modest and designed to be populist.”

Richard Colwell of Threadneedle Investments, UK equity manager for the Strategic Managed fund, was slightly more surprised that there were no major pre-election sweeteners or giveaways. “We had relatively modest increases in tax allowances offset by enhanced tax avoidance measures and an increase in the levy on the banks. We continue to avoid the banking sector in our UK portfolio.”

Key assumptions

On the economic growth front, the 2015 GDP forecast was nudged up to 2.5% from 2.4%, but inflation was revised down dramatically to just 0.2%, and is not expected to reach 2% until 2019/2020. “Significantly lower inflation implies lower debt servicing and welfare costs, which should enable the government to take the edge off future spending cuts, although we would note that the Bank of England expects inflation to be back at 2% over the next two years,” observed Colwell.

“By cutting welfare bills and the cost of servicing government debt, the brighter economic backdrop has improved the government’s fiscal prospects; and by upping the bank levy and lowering the lifetime allowance on pensions, the Chancellor was able to announce some eye-catching savings and pension measures – while still pledging to run a budget surplus by 2018”, commented Richard Dunbar of Aberdeen Asset Management.

However, Neil Woodford of Woodford Investment Management remains concerned about the longer-term outlook for the UK economy, “The forecasts released by the Office for Budget Responsibility, and the views expressed by George Osborne in the Budget, are not consistent with our views at all. So, although the claims of a return to a budget surplus by 2018-19 for the first time in 18 years will make great headlines – and may sound attractive to potential voters – we believe a dose of reality is required.”

“You don’t have to flex these assumptions very much at all, to get a glimpse of a much more difficult fiscal environment. What if growth fails to remain at these levels? What if inflation fails to return to the Bank of England’s 2% target? In our view, these are both realistic concerns”, he added.

No shocks

In comparison to events in last year’s Budget, there were no great shocks at stock and sector level. “The gyrations that were seen in the share prices of life assurers and annuity providers following last year’s pension announcements were absent this time round”, observes Colwell. “We used the resulting weakness in life assurance that was seen last year as an opportunity to add to our favoured positions.”

Colwell also noted the measures to support the North Sea oil and gas industry, although these have come at a time when the oil majors are cutting investment. He believes the new, more flexible ISA rules should be positive for asset managers, as should the new personal savings tax allowance. “The bottom line though is that the Budget has not resulted in any change to our UK equity portfolio.”

However, one sector for which there appears to be more obvious benefits is housing. “The Help to Buy ISA looks significant in scale and certainly underlines the importance of the health of the housing market for the Chancellor”, noted Aberdeen Asset Management.

“In reality, the success of the Budget will be judged by the opinion polls in the coming weeks,” summarised Adrian Frost. “Compared with the forthcoming election and the prospect of a European referendum, it barely registered on the Richter Scale.”

The opinions expressed are those of the fund managers quoted and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research of advice. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

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