The UK Budget on 30 October 2024 had a mixed reception from investors. While there was not anything that demanded an immediate re-evaluation of the multi-asset classes we invest in, we believe that in the longer run there is likely to be an impact on UK equities, bonds, and alternative investments.
Gilt yields and fixed income
Following the Budget announcement, the 10-year gilt yield rose approximately 30 basis points, while longer-dated UK government debt has seen further increases. This has been driven by investor concerns over increased government borrowing and potential inflationary pressures. Higher gilt yields present opportunities for income-seeking investors, making government bonds more attractive relative to equities. UK corporate bond performance has been steady as their financial health remains strong. However, if companies face higher borrowing costs in the longer run, this could weigh on profitability. Investors will find the environment favourable for increasing bond allocations, particularly those with mandates focused on income generation within bond portfolios.
Equities
The UK equity market, as can often be the case with UK budgets, shrugged its shoulders somewhat. Naturally, sectors sensitive to rising interest rates, such as real estate and utilities, may face the increased challenges of higher financing costs. The government’s capital investment policies lacked detail in the Budget but did confirm further investment in transport and the delivery of 1.5m new homes. This is likely to boost sectors like construction, engineering and materials. There is a strong possibility that this improves profitability in some domestically focused businesses within these value chains. In this case, we would note that finding the right companies (i.e. stock selection) is more important than simply a broad allocation to an index. UK investors should be mindful that the UK equity market is only a small portion of the global equity market. However, the UK’s largest companies, including those in sectors such as energy, finance and consumer goods, have significant international exposure, meaning that their profitability is often linked to the broader global economy rather than solely the domestic market. This dynamic allows UK investors to benefit from some global growth trends within their UK equity exposure.
Sterling and global assets
Following the Budget, sterling experienced a slight decline, reflecting market apprehension over higher government debt. A weaker pound can impact returns on global assets, often enhancing the value of international investments in UK-based portfolio as foreign earnings translate into more pounds. This currency effect could benefit investors with exposure to international equities and bonds, as well as the FTSE’s largest companies which, as we noted above, generate substantial revenues abroad. Should sterling continue to weaken, the currency tailwind could further boost the returns on global assets, the potential effects of currency volatility notwithstanding.
Alternatives
Rising gilt yields and possible higher interest rates for longer could impact alternative assets as well. Real estate may face challenges due to higher financing costs, affecting commercial property values. However, infrastructure projects, aligned with government priorities, could see stronger demand. Some commodities (notably safer-haven precious metals) may also gain traction as an inflation hedge, appealing to investors seeking protection from inflationary pressures amid higher government spending.
Balancing multi-asset portfolios globally
For UK investors, the UK market remains just one component of a diversified global portfolio. By focusing on asset allocation across regions, investors can potentially navigate domestic shifts while capturing growth opportunities abroad. Rising gilt yields may encourage investors to adjust fixed-income exposure domestically, while global equities and alternatives — especially in sectors benefiting from international growth — are likely to continue to drive long-term returns.
Important information
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. The views are subject to change at any time without notice.