Budget uncertainty creates buying opportunities for UK equities
Government comments and media leaks have created significant uncertainty in the lead-up to the Labour government’s first budget at the end of the month. This has led to a buyers’ strike in the equity market, as speculation about where tax rises are going to hit reaches fever pitch.
From my perspective, this buyers’ strike has created opportunities in our favoured recovery shares – and in the UK market overall. Why?
The main reason is that the fundamentals remain strong.
- UK equities are good value, trading on a modest prospective P/E ratio of 12
- Interest rates are falling, the economy is growing – and the very important UK consumer is in good health in terms of their income and balance sheet
- Corporate profits and cash flows are robust and improving in B2C cyclical sectors
- While government fiscal policy is uncertain in the pre-Budget period, parts of the economy – construction in particular – are already benefiting from Labour’s focus on growth.
The second reason is more of a short-term behavioural one. The contents of the Budget will only be known for certain on 30 October. Until then, end-of-the-world speculation about tax rises is circulating, dampening animal spirits and creating this buyers’ strike.
This sets the stage for Rachel Reeves to significantly exceed these doom-and-gloom expectations. How can she do that? By going back to a clear message of achieving economic growth. She needs to provide the detail that will give the market confidence that the government can deliver this growth.
Of course there will need to be some tax rises – too much has been said about the deficit for this not to be addressed. However, the politics and economics of blaming the Tories and taxing the rich have clearly not resonated with the public or media. Expect to see this dialled back and replaced with a more considered approach that reassures the capital providers who will need to be on board with Labour’s investment and growth plans.
All this means that now is an ideal time to capitalise on UK recovery stocks. They comprise a very broad range of good companies, on modest valuations, where fundamentals are just starting to improve. The current buyers’ strike has simply provided a window to top up holdings in these stocks at lower valuations.
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