sideshow budget

sideshow budget

June 30th, 2010

Just as they had started to look a little healthier, equity markets have been gently sliding since the Emergency Budget. Should we take this as a sign of their disapproval? After all, there are some chunky cuts involved and not everyone agrees with the Office for Budgetary Responsibility’s verdict that the austerity measures will shave just 0.3% off 2011 growth. However, the slide does seem incongruous given some of the supportive, pro-business measures included by Chancellor George Osborne. The lowering of corporation tax is favourable as is the support for research and development expenditure and there is also plenty – to encourage entrepreneurialism. Furthermore, as M&G’s Jim Leaviss explains here, the consensus appears to be the UK has done enough to preserve its AAA rating. Certainly business organisations such as the CBI, ABI and the Institute of Directors have been publicly supportive of the changes in the Budget and most have agreed with the Chancellor’s assessment that it is a pro-business set of measures. Even the banks appear to have breathed a small sigh of relief as the new levy on the sector proved less onerous than they were expecting. Tax hikes have historically been more negative for equities than spending cuts and here, therefore, the Budget should have been positive for stockmarkets. The Chancellor’s pledge for deficit reduction has been to generate 20% in tax rises and the remainder from public spending cuts. The trouble is, the best Budget in the world would not have made much difference to the issues that are really troubling markets – the strength of the recovery, the sovereign debt problems and the availability of credit. The Chancellor tinkered around the edges with the banks, suggesting they needed to pay out more in loans to businesses and less in bonuses and dividends but, ultimately, it is European lawmakers who will have the final say on capital adequacy requirements. There are two other issues that continue to act as a drag on equity markets – US housing and BP. There are plenty who believe the global economic recovery cannot begin in earnest until the US housing market shows signs of recovery and, over the past few weeks, the key indicators have been weakening. New home sales dropped to unprecedented lows, prices fell to the lowest level since 2003 and the Mortgage Bankers Association’s purchase index was also weak. Bad news on BP meanwhile feels like a daily occurrence. The price appeared to have found a floor at around 350p, only to suffer further setbacks and fall towards 300p. It may be a company-specific issue, but it is a daily reminder of the vulnerability of certain companies. Ultimately, the Budget may have been good for business, but the markets have bigger fish to fry. For all your investment requirements please call Mark and Clare at GMP Independent Financial Advisers LLP on 0207 288 6400

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