1 . Pain from London
It is possible our new chancellor Rachel Reeves had hoped to stimulate some Churchillian spirit with her bleak description of the problems faced by the UK economy and public finances. In reality, she seems to have just perpetuated gloom. Since the election, consumer confidence has fallen, business investment has slowed, and many have felt they are waiting with something of a sense of foreboding for the budget on 30th October.
It remains to be seen what tax changes this will bring, although the mood music suggests some of the more dramatic moves planned around pensions have been withdrawn after much scrutiny.
The big picture, of course, is that Reeves is seeking ways to both close a short-term funding problem and work out how to get long-term investment up to stimulate growth. She must do this within a double-tied straitjacket of firstly her own promises (not to raise the main rates of tax) and secondly the very real threat that too much more borrowing could lead to a re-occurrence of the market turbulence which accompanied Liz Truss’s mini-budget. Investors’ patience with the UK is after all somewhat thin after the events of only two years ago.
However, we should note that whilst it is easy to paint a dramatic narrative about these things, most economic policy-making is about incremental moves which over time add up to real change rather than dramatic events. We believe it is likely she will shift the accounting around enough to find a way to invest more but being mindful of the market reaction will provide enough reassurance to avoid a serious rise in UK borrowing costs. This at least means that whilst the budget could feel like a bleak day, it could be the start of a new, albeit muted, cycle of investment for the UK. And we should remember that the indications are that the global economy continues its recovery so Reeves may yet get some help from the wider world. Improvements will take much time to come through but ultimately, we believe the gloom will lift.
2 . Promises of hope from Beijing
Whilst the UK grapples with the question of whether it can invest at all, in Beijing a different process is underway. Here, after years of tepid growth, President Xi has promised to start a major cycle of government investment in a bid to revive Chinese economic growth back up to its 5% target. This promise elicited a sharp rally in Asian shares over the past month. We believe that an eventual recovery in Asia could be a significant long-term source of returns for portfolios in the years ahead and have made a modest move, particularly in higher-risk portfolios, back into Asian companies. However, as with all changes like these, we move gradually, knowing that there can be false as well as real dawns. Nonetheless, there can be little doubt that Asian shares are cheap compared to historical prices and the rest of the world. A revival here has the potential to be significant in the years ahead for the returns we can deliver.
3 . Anxiety from Philadelphia
The other major news story, of course, is the upcoming US presidential election which is just less than one month away. The polls are about as close to an exact tie as it is possible to imagine. On the face of it, if this were a game of poker you would probably rather have Kamala Harris’s hand. She has a very small lead in just enough swing states to win. But all of these leads are within the margin of error for polling and her advantage could well be illusory. For investors, the key consideration is really around US debt. The spending plans proposed by Donald Trump and the tax cuts he is adding indicate a significant expansion of US borrowing in the next four years. This could have the effect of raising global borrowing costs and forcing interest rates down faster than expected, but also could lead to a correlated rise in inflation. The United States, though, really is different to every other economy in the world. As the world’s reserve currency and the lender of last resort, US administrations have far more leeway to borrow and invest than the painfully narrow wriggle-room enjoyed by our own leaders in the UK. We believe the US economic recovery can continue under both potential presidents.