The economy is well-placed to deal with any challenges ahead, UK equity veterans Neil Woodford and Richard Buxton argue, and the sub-text to the yesterday’s Spring Budget could offer some confidence in the stock market.
Philip Hammond delivered his first Budget as chancellor yesterday but it was a broadly subdued affair (a few quips aside) and saw little in the way of bold policy announcements. Of course, while there were changes to areas like taxation, education and social care, there were few headline-grabbing changes with many seeing Hammond as holding back on this until the Autumn Budget.
Neil Woodford, manager of the CF Woodford Equity Income fund, says the “the Budget was more interesting for its context than its content” and notes that there is an “observable difference” between Hammond and predecessor George Osborne.
Real UK GDP growth fan chart
Source: Office for Budget Responsibility
Woodford has been critical of Osborne in the past. Following the March 2015 Budget, Woodford said the government needed “a dose of reality” after deeming the chancellor’s claims of economic strength and the return to a budget surplus to be “too optimistic”.
“Much of the austerity that had been embedded in Osborne’s plans has been stripped out – there is now more than £100bn of extra borrowing proposed over the next five years than there was in Osborne’s last Budget,” the FE Alpha Manager said of yesterday’s announcement.
Two years later, however, and the economy is now performing better than expected. This allowed Hammond to put to work a £16bn windfall, which was the result of a reduction in borrowing for this financial year compared to what was forecast in November, although some will be held back for a later date.
Yesterday’s Budget also saw the Office for Budget Responsibility upgrade its growth forecast for the current year from 1.4 per cent to 2 per cent – a view which sits well with Woodford’s own assessment of the health of the UK economy.
“We are more upbeat on the outlook for the UK economy than many commentators – the market consensus, in our view, has become too bearish in the aftermath of the Brexit vote. We are more positive on the outlook for the UK and, naturally, more positive about the outlook for some domestic stocks,” the manager said.
“There are challenges ahead economically – not least, the public debt burden which, despite recent improvements, remains ‘eye-watering’ – but the UK economy is relatively well-placed to deal with them and we would expect the debt burden to start to diminish more quickly than the chancellor has forecast, over the next five years.”
Performance of CF Woodford Equity Income vs sector and index since launch
Source: FE Analytics
Woodford recently highlighted his confidence in the UK economy when explaining his bullishness ahead of the launch of his new CF Woodford Income Focus fund.
The manager conceded that he has been more cautious about the UK and global economy than many for most of the post-financial crisis period but he is now seeing signs of strength than he thinks many are not recognising.
He is not the only UK equity manager expressing confidence in their reaction to the Spring Budget.
Richard Buxton, head of UK equities at Old Mutual Global Investors, said: “From an investor’s perspective, what was unsaid and unwritten in Budget 2017 is of as much interest as what was revealed.
“Judging by a basic analysis of the history of the length of the Red Book (the official document setting out the Budget), we can deduce that Hammond is determined to keep his cards close to his chest. This was comfortably the shortest Budget in recent history.”
Buxton says the chancellor’s optimism seems justifiable, given the short-term improvements to economic forecasts. The fact that many of the spending measures announced are essentially front-loaded means that Hammond “is giving himself more fiscal headroom” should any challenges be thrown up in the coming years.
“He knows that, in reality, the months and years ahead could well be far from plain sailing,” the manager said.
Historic number of pages in the Red Book
Source: OMGI, March 2017
All in all, Buxton says that the 2017 Budget “changes very little” for UK equity investors, especially as the chancellor gave nothing away in terms of the UK’s looming exit negotiations with the European Union.
“As and when the government formally triggers Article 50 and the complicated Brexit process begins in earnest there may well be choppy waters ahead, even if that is not what we saw in the market’s immediate reaction to today’s announcements,” the manager said.
“If, and when, more challenging market conditions do present themselves, it will be those investors who are bold enough to put more money to work when the markets are at attractive valuations who will fare the best.”