When is a Budget not a Budget? When it’s a Winter Economic Plan. Rishi Sunak’s final throw of the dice late last month to prevent a jump in unemployment numbers filled some with fear and others with hope. But all agreed it will have a major impact on the shape of the UK economy over the coming months.
The plan indicated a change of tack that will hit some sectors hard. Despite tighter restrictions on hospitality and leisure, the Chancellor will only support ‘viable’ jobs where staff can work at least a third of their usual hours. As Jim Wood-Smith, chief investment officer at Hawksmoor Private Clients, puts it, the message is to ‘man up and get on with it’.
‘Covid has changed the world and the Government will no longer write blank cheques to pretend otherwise,’ he says, calling Sunak’s plan a ‘watershed moment’ and a change ‘for worse and for better’ – depending on which industry you are in.
Boxing clever: Chancellor Rishi Sunak
‘The prognosis for social industries – mainly leisure, hospitality and entertainment – is not appetising,’ he says. ‘The other edge to the sword is that 2021’s prospects are starting to look brighter.’
For investors wanting to navigate what looks like a winter of discontent, understanding the implications of the Chancellor’s new plan will be crucial if they are to arrange their portfolios accordingly.
There’s a big bill coming, but not just yet
Sunak’s winter plan focuses heavily on the Job Support Scheme, which will come in when the furlough scheme ends on October 31.
Under the replacement, workers who are employed part-time will have their wages topped up by both the Government and the employer. Big firms will have to show that their turnover has fallen by a third and also must not pay dividends to investors while using the scheme.
The tourism and hospitality sectors will continue to benefit from reduced VAT at 5 per cent until the end of next March – and there are further extensions to business loan schemes and a new but lower grant for the self-employed.
Because this was a plan and not a Budget, there was no explanation of how these measures would be paid for. Tom Selby, senior analyst at wealth manager AJ Bell, expects taxes will have to rise, with investors most affected.
‘The hope will be that a rapid economic bounceback driven by improved Covid testing and the development of a vaccine might do some of the legwork. But this is likely to be coupled with hard decisions on taxes and state spending,’ he says.
‘Various ideas have already been floated, including raising capital gains tax, breaking the state pension triple-lock and doing away with higher-rate tax relief on pension contributions.’
Can Isa and pension allowances survive?
Investment experts suggest savers make the most of tax breaks while they can, as Sunak’s economic stimulus will have to be paid for. The breaks we take for granted to help us to grow our portfolios – not just pension tax relief but generous Isa allowances and capital gains tax allowances – look likely to be victims.
‘Reductions in public spending and rises in taxation will have consequences,’ warns Jason Hollands at wealth manager Tilney. ‘There is no such thing as a free lunch. If you can, make use of your pension and Isa allowances, as higher taxes are almost certainly coming.’
He is echoed by Moira O’Neill at wealth manager Interactive Investor. She says: ‘At some point, we’re all going to have to start paying for Covid. Its cost to the Government is second only to the cost of rebuilding the country after World War II.
‘Since tax rises seem a given, the immediate winners of the ‘no-Budget’ this autumn are all UK taxpayers. So now is the time to make as much use of your tax-free allowances as you can – while they are still around.’
Anyone aged 16 or over has a £20,000-a-year Isa allowance, while all bar the highest earners can claim tax relief on pension contributions of up to 100 per cent of their earnings, capped at £40,000 a year. There are also generous rules allowing you to carry over unused allowances from previous years.
Even payments into a child’s pension qualify for tax relief. So if you pay the maximum of £2,880 a year, £3,600 is invested in their future.
Don’t stop investing, but do so wisely
O’Neill recommends regular investing to counter volatility – caused, for instance, by a sharp pick-up in Covid cases, lack of progress on vaccines or Brexit hiccups.
She says: ‘Nervous investors should invest on a regular basis because it smooths out some of the highs and lows in the price of shares.’ O’Neill believes multi-asset funds are a good choice. This is because such funds have exposure to assets other than equities – bonds, for example.
UK equity markets have underperformed the rest of the world by 24 per cent this year
She likes the low-cost Vanguard LifeStrategy 20 per cent, 60 per cent and 80 per cent equity funds, which have ongoing annual charges of 0.22 per cent. The 20, 60 and 80 percentages refer to the amount of shares in the fund, with the rest made up of less volatile assets such as corporate bonds. So the 80 per cent fund is the most volatile.
In the short term, despite Sunak’s initiatives, many UK businesses look like they’ll face a harsh winter. Those in hospitality, which were buoyed by Eat Out to Help Out, will suffer from the 10 o’clock curfew. With the uncertainty of Brexit hanging as well, there will be some bleak months ahead.
UK equity markets have underperformed the rest of the world by 24 per cent this year, according to Rupert Thompson, chief investment officer at the wealth manager Kingswood. He says: ‘They look set for a choppy few weeks and months. Further out, we remain more positive – not least because the focus should hopefully switch from the rollout of new lockdowns to the rollout of a vaccine.’
Darius McDermott, managing director at Chelsea Financial Services, believes the Chancellor may have more tricks up his sleeve if things get worse. He says: ‘He’s likely to keep some of his powder dry should the situation deteriorate over the winter. Expect further announcements.’
Chelsea’s McDermott suggests UK smaller company funds could be a good place for investors to look for long-term value
Smaller firms can mean bigger returns
Despite Sunak’s best efforts, even British investors are shunning UK stocks. According to the Investment Association, the trade body for investment managers, the proportion of British investors’ assets in UK equity funds fell to 14 per cent at the end of June. It stood at 39 per cent in 2005.
The picture may look bleak, with restrictions likely to last another six months and Brexit uncertainty. That said, many have money to spend, stored up from a lockdown in which a lot of households added to their savings. The most recent jobs data was better than expected, too, meaning the economy might be more resilient than we think.
Chelsea’s McDermott suggests UK smaller company funds could be a good place for investors to look for long-term value. He suggests Amati UK Smaller Companies, Tellworth UK Smaller Companies and Marlborough Special Situations.
The Amati fund has 2 per cent of its holdings in Oxford Biomedica, which is contracted to produce the AstraZeneca-Oxford University Covid vaccine if it is successful. The fund has generated a return of 6.7 per cent over the past year and 19.8 per cent over three years.
Tellworth’s top holding is Codemasters, a racing game developer that should do well from a stay-at-home winter. The fund, which is too young to have a three-year track record, is up 15 per cent in the past six months, though it generated a one-year loss of 7 per cent.
As we head into a difficult winter, Sunak’s measures won’t be enough to save every company, and sentiment is likely to remain subdued for some time. However, a vaccine announcement could change the game very quickly, and even out-of-favour sectors could be boosted.
His new focus on viable jobs will put the UK in a better position to recover after restrictions are eased. If the UK economy really does ‘man up and get on with it’, as Wood-Smith suggests, those prepared to invest now could do their investments some long-term good.