all in the price

all in the price

March 24th, 2010

In theory, UK investors should be steeling themselves for a rough ride over the next few weeks. The Budget and then, eventually, the General Election are likely to disrupt markets that have only just recovered some measure of equilibrium. Should they be worried? Without wishing to dismiss the market’s capacity for hysteria, it may not be as bad as people might imagine. The worst-case scenario is that the Budget does not announce sufficient measures to tackle the UK’s deficit and placate the rating agencies. The UK’s debt is therefore downgraded, becomes more expensive, sterling weakens even further and so the spiral continues. This sounds pretty bad, but it’s not like the market hasn’t considered this. In fact, it is one of its central scenarios. If it happens, markets may lurch down in the short term, but they are likely to find a floor reasonably quickly. Also, it isn’t that likely to happen. Alistair Darling has – finally – acknowledged the electorate is not stupid and so recognises a ‘give-away’ Budget is unsustainable. There will no doubt be some nakedly political posturing in the Budget and certain stocks may be affected – the banks spring to mind – but the Chancellor must realise the UK losing its AAA rating weeks before an election would make the Labour Party look very foolish indeed. Equally, the rating agencies cannot be unaware of the UK election. With a new Government is likely to announce a new Budget shortly after the election anyway, it would seem perverse to base the UK’s rating on this week’s version. UK markets still have the ‘hung parliament’ issue hanging over them, but it is too easy to suggest such an outcome would lead to complete political inertia and no measures to tackle the deficit. It is undeniably a potential barrier to decision-making but, again, it may not happen. If the Conservatives do manage to eek out a small majority, there could even be a bonanza on the prices of gilts, corporate bonds and shares. This should all be seen in the context of some better news coming out of the UK over the past couple of weeks. Unemployment is down, which has had a knock-on effect on government borrowing. Meanwhile the National Institute of Economic & Social Research said the economy was still growing in the December to February period, albeit weakly. Even the banks are doing better, with Lloyds expecting to be profitable in 2010. There are plenty of issues that could trouble investors but, for the most part, markets have already been troubling themselves about them for some time. Markets may be volatile as they digest the news, but the downside looks relatively limited. For all your investment requirements please contact Mark or Clare at GMP Independent Financial Advisers LLP

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