Where to now for UK markets after the Autumn Budget?

It was very obvious from social media chatter in the lead up to this week’s Autumn Budget in the UK that many investors were feeling unprecedented levels of concern. This widespread apprehension highlighted the heightened stakes associated with this fiscal update.

Rachel Reeves’ budget delivery was under particular scrutiny, not only for its content but also for how she said it. Observers monitored key market indicators as she spoke — the pound, gilt rates, and the AIM market — especially given the caution inspired by past budgets.

The initial reaction was relatively calm, with no significant market spikes, signalling a positive response to her approach. This composed market response would likely be seen as a success given the tense build-up to the announcement.

In the lead-up to the budget, Reeves hinted at potential challenges and upcoming changes, possibly to manage expectations. However, the pressing concern for many was whether we’d see another crisis akin to 2022’s “Truss moment.” Fortunately, the AIM market’s response indicated otherwise, which brought a sense of relief.

“Reeves’ confident delivery reassured audiences, and while this budget might primarily set the stage for future changes, it signals potential adjustments should economic conditions require them,” observed Chris Metcalfe, Chief Investment Officer at wealth manager IBOSS. “The growth forecasts remain relatively weak, although the flexibility to revise these as the economic landscape shifts was highlighted.”

In summary, Reeves’s confident handling and the market’s relatively muted reaction to the budget delivery suggest a cautiously optimistic outlook.

UK outlook after the Budget

Despite recent economic and political challenges, there seems to be a cautiously positive outlook for UK investments. The UK currently presents attractive valuations, especially when compared to global markets, creating a compelling case for investors with a long-term perspective.

The recent budget announcement marked a pivotal moment, and we have thus far avoided any severe market reactions akin to last year’s volatility. This absence of a “Truss 2.0” scenario has fostered a sense of market stability, allowing investors to focus on underlying economic fundamentals rather than political turbulence.

• Cybersecurity stocks remain one of the strongest performers out there
• US dollar will be supported by Trump tariff threats, analysts reckon
• WisdomTree adds physical XRP ETF to its listed crypto funds

The UK’s starting valuations remain particularly attractive, providing a solid foundation for investors. Notably, the UK benefits from several unique advantages that position it favourably:

• Currency independence: The British pound remains autonomous, offering flexibility in economic policy and a unique edge over some other markets.
• Strong corporate legal framework: The UK’s robust legal framework continues to be a magnet for both domestic and international investors seeking security and clarity in corporate governance.
• Entrepreneurial spirit: Despite economic headwinds, the UK maintains a vibrant entrepreneurial landscape, supported by high levels of innovation, particularly in sectors like technology, healthcare, and finance.

Short term volatility from the Budget

Short term, market volatility has made its way to London on the back of financial reforms that point to increased taxes, rising government spending, heavier bond issuance and a stronger regulatory regime.

Reeves announced that the government will increase taxes by £40 billion (USD $52 billion). It’s the largest climb in three decades. The measures target companies and the wealthy, with higher levies on payrolls, capital gains, second homes, private schools, inheritances and more.

Investors have responded to the budgetary changes by selling off British assets, effectively sending yields north and stocks south.

While the pound sterling took an initial dive following the developments, it has recovered much of its losses. Still, marketplace reactions so far, have been much milder than the turbulence following Liz Truss’ policy developments back in 2022.

Borrowing to re-build

The new budget would result in £70 billion of increased government spending, or about 2% of the UK’s economic output. Prime Minister Keir Starmer and Chancellor Reeves maintain that the spending is needed to rebuild the country and provide an infrastructure system that is supportive of businesses and societal progress. Reeves is proposing debt raises to plug a £22 billion fiscal gap. The country’s debt, at slightly more than £2.8 trillion, is roughly equivalent to the UK’s annual GDP.

Conservatives argue that the measures are irresponsible and effectively borrow from the future. Furthermore, Reeves’s minimum wage hike and enhanced employment rights are expected to burden British businesses at a time when companies are reporting declining confidence. And while Reeves believes that lofty levels of issuance will result in pronounced growth rates, like in the US, the opposition contends that the UK is essentially following the models of nearby European economies whose performance have suffered from the weights of elevated taxation, excessive regulations and lofty borrowing levels.

Related WisdomTree ETFs