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Sterling, Big Oil and homebuilders: the winners and losers from upcoming UK budget

Published 11/15/2022, 02:10 AM
Updated 11/15/2022, 02:16 AM
© Reuters. FILE PHOTO: A view shows London's skyline amid the coronavirus disease (COVID-19) outbreak, in London, Britain November 2, 2020. REUTERS/Matthew Childs

By Amanda Cooper, Samuel Indyk and Harry Robertson

LONDON (Reuters) - The moment of truth is almost here for Britain's new prime minister Rishi Sunak and finance minister Jeremy Hunt.

British markets have regained some poise after the carnage triggered by September's fiscal statement, but as the UK slips into recession, the outlook is far from rosy.

Here's a look at some of the likely winners and losers from Thursday's budget.

IN FOR A PENNY, IN FOR A POUND

The pound was a major casualty of ex-Prime Minister Liz Truss's plan to cut 45 billion pounds ($52.76 billion) in taxes by loading up on debt, which sent UK markets into a tailspin and exposed vulnerabilities in the pensions industry.

Sterling has recovered nearly 15% from late September's record low of $1.033, with intervention by the Bank of England and Truss's swift replacement by Sunak helping to stabilise markets. Newly appointed finance minister Jeremy Hunt has meanwhile ditched much of her Sept. 23 fiscal plan.

Sterling is still down nearly 14% against the dollar in 2022, however.

Thursday's budget may not contain any Trussonomics-style surprises, but the expected tax increases and spending cuts - aimed at closing a 50 billion-pound hole in Britain's finances - could bring a reminder of the pound's fragility.

"If anything, the pound could come off on concerns of the Chancellor (Hunt) going too far trying to fill that hole (in public finances), which could unnerve the markets," StoneX market analyst Fiona Cincotta said. She also expressed concern about increases in dividend and capital gains taxes, given how much of the UK economy is made up of small businesses.

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GRAPHIC: Welcome to Poundland (https://graphics.reuters.com/BRITAIN-WINNERSLOSERS/myvmonmzbvr/chart.png)

NO MORE GILT TRIPS

Yields on UK government bonds are broadly back to where they were before September's rout and Hunt and Sunak are unlikely to risk further volatility.

The prospect of tax rises and spending cuts is largely priced into bonds, said JPMorgan (NYSE:JPM) Asset Management's chief investment officer for fixed income, Iain Stealey.

The benchmark 10-year gilt yield, which moves inversely to the price, is at around 3.3% - down sharply from October's 14-year high of 4.6%.

Stealey expects the yield to fall to around 3% by the end of the year as gilts continue to recover, with monetary policy, rather than fiscal policy, likely to be the main driver.

GRAPHIC: Gilt yields surged in September (https://fingfx.thomsonreuters.com/gfx/mkt/dwvkdrgoapm/10%20year%20gilt%20histogram.png)

MIDDLING MID-CAPS

Britain's FTSE 100 has outperformed most other markets this year, thanks to its high weighting of commodities and relatively large proportion of revenues generated from overseas.

The more domestically-focused FTSE 250 has lagged and analysts don't see that changing any time soon given the likely hit to smaller companies from higher taxes.

Edward Park, chief investment officer at Brooks Macdonald, said the UK economy was sensitive to a high interest rate environment and noted concerns over the housing market and Brexit.

"Domestic UK equities are being treated with caution by investors both domestically and internationally," he said.

GRAPHIC: FTSE 100 outperforms (https://fingfx.thomsonreuters.com/gfx/mkt/klvygexxbvg/Pasted%20image%201668172830991.png)

A CRUDE TARGET

Energy companies have reported bumper profits this year, thanks to soaring crude oil and gas prices. But with household utility bills surging, there is growing pressure for a windfall tax on company profits to help pay for measures to support businesses and individuals.

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London-listed rivals BP (NYSE:BP) and Shell (LON:RDSa) alone delivered profits of almost $20 billion in the third quarter.

"North Sea oil and gas producers already have significant marginal rates of tax but from a vote-winning perspective a windfall tax on the sector is a fairly soft target," said Scott McKenzie, fund manager at Amati Global Investors.

GRAPHIC: Cash machines (https://graphics.reuters.com/OILMAJORS-PROFITS/lbpgnemlnvq/chart.png)

HOMEBUILDER RESPITE?

Rising rates and cautious consumers have weighed on British homebuilders. The FTSE 350 household goods and home construction sub-index is down over 40% in 2022 versus a broadly flat FTSE 350.

A leap in mortgage rates and higher raw materials costs have already put a sizeable dent in the sector.

Amati's McKenzie thinks the tricky environment may begin to improve even if house prices decline next year and the volume of housing transactions falls.

"The political background for homebuilders has been more hostile in the current year than it has in the past," McKenzie said, noting previous tax increases for homebuilders and cladding remediation costs introduced by Michael Gove, the minister for Levelling Up, Housing and Communities.

GRAPHIC: Homebuilders (https://fingfx.thomsonreuters.com/gfx/mkt/zjvqjqxxmpx/Pasted%20image%201668173687644.png)

($1 = 0.8529 pounds)

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