Kwarteng’s ‘seismic’ growth plan is a bold set of moves that comes with risks – Reuters

New Chancellor Kwasi Kwarteng heralded “a new approach for a new era” as he presented the Truss government’s sweeping tax cut plans on Friday.

Jason Hollands, managing director of investment platform Bestinvest, said: “Although a number of measures have been well followed in advance, it is fair to say that the seismic decision to abolish the rate of additional taxation of 45% was totally unexpected”.

“As well as the acceleration of the 1p base rate cut and a range of other direct and indirect tax cuts, the Chancellor announced a £45billion fiscal stimulus, according to her own figures. of the Treasury. This is undoubtedly a huge role of the dice.

He adds: ‘This goes hand in hand with the huge commitment to cap energy bills for homes and businesses which he says will today amount to £60billion in the first six months.’

“Coming a day after the Bank of England raised its benchmark interest rate at the seventh consecutive monetary policy meeting, the Chancellor’s statement highlights how fiscal and monetary policy are now pulling in opposite directions.”

The Bank of England raised interest rates by 0.5 percentage points to 2.25% yesterday, the highest level since 2008, with three members of the monetary policy committee voting for a bigger hike of 0, 75 which could still arrive in November, alongside what will be a new set of economic forecasts from the Bank.

Hollands says the major fiscal boost to the economy could extend the BoE’s battle to get inflation under control: “We have a situation where rate regulators are tapping the economic brakes with increasing ferocity, at the same time the The British government has decided to put its foot firmly on the accelerator.Higher interest rates will slow down the revival of growth which the Chancellor obviously hopes will result from the tax cuts.

He adds: “A fiscal expansion of this magnitude is certainly bold, but also risky, not least because the public finance deficit will be financed by borrowing at a time when borrowing costs are rising.”

UK bond yields, which have risen sharply this year, climbed further after Kwarteng’s speech: two-year gilt yields hit a new high since October 2008 and last rose 47 basis points during the biggest daily jump since November 2009. Five-year yields, sensitive to economic policy expectations, hit a similar high and rose 47 basis points in the biggest daily rise since 1991.

Ten-year gilts were yielding 3.8% by late morning, down from 0.8% a year ago.

“A major potential downside is that markets are worried about the sustainability of UK public finances,” Hollands says. “Failure to convince could drive the pound down, having already plunged to levels against the dollar last seen in 1985.” The British pound fell below $1.11 today.

“The scrapping of corporate tax hikes and the effect of the reversal of National Insurance hikes will be particularly welcome news for struggling companies focused on the domestic market,” says Hollands.

“With so much negativity in domestically-focused companies – which tend to be mid- and small-cap – naysayers might be tempted to invest in them now given this helpful news on tax and energy costs these days. last days. But for now, it should be seen as pain relief rather than a cure. The prospect of a very deep recession has faded somewhat, but Britain’s domestic economy still faces tough times, as the BoE pointed out this week.

“When it comes to the biggest UK companies, these have a relatively low exposure to the domestic economy and a high weighting to sectors that have in the past proven in times of high inflation and difficult growth – energy, healthcare and consumer staples.

“Furthermore, in total around three-quarters of FTSE 100 company revenues are made outside the UK, much of it in US dollars.” In the short term, as overseas profits are reflected in profits and dividends declared in sterling, this should be favorable.

“The valuations of blue-chip UK equities also look attractive overall, both relative to other developed markets and their own long-term trend. They also offer a relatively attractive dividend yield of c. 4%, more than double the dividend yield of global equities.

“Many private investors avoided large-cap UK stocks for several years as the market lacked the excitement of a significant growth sector like technology and communications services and the long-running Brexit saga cast a shadow. long shadow, but we’re in a different time now. While the days of ultra-low borrowing costs and massive money printing have been overshadowed by high inflation and rising borrowing costs, it might be a good idea to take a fresh look.