husselbee slow recovery corporates above gilts

Now he has had time to digest last week’s Budget, John Husselbee assesses what it means for his investment portfolios, with a particular emphasis on his fixed income holdings.

husselbee slow recovery corporates above gilts


This was partly because the majority of his speech had already been leaked to the newspapers,   yet I appreciate the limited scope for surprise while Mr Osborne and his coalition partners remain committed to their deficit reduction plan.

This time next year, Rodney…

Some say this was a budget for the millions and others for the millionaires; everybody will have their opinion depending on how it affects them.  Of note to me was the emphasis of reducing taxation for the average consumer by increasing the personal allowance. This is an attempt to boost the economy which the OBR now forecasts to be 0.8%, an increase of 0.1% from the Autumn Statement.

The Chancellor believes that a growing economy will reduce unemployment, which is expected to peak later this year at 8.7%. That will only happen if we see a sharp increase in business investment. To improve the UK’s international competitiveness, the Budget proposed accelerating the cut in Corporation Tax from 26% today to 22% by 2014. However by only lopping 5p off the top rate of income tax, the UK remains in the top third of industrialised nations – hardly an incentive for chief executives to relocate operations to the UK.

The measures proposed to boost economic activity and increase tax receipts will need time to work.  In the interim, as a nation we continue to spend more than we earn, with the shortfall estimated around £100bn this year. This shortfall will need to be borrowed and any serious deviation from the deficit reduction plan risks losing the confidence of the financial markets.

The UK to date has been able to borrow at record levels of interest, artificially created by the Bank of England’s successive quantitative easing programmes. Furthermore, maintaining AAA credit status while eurozone neighbours are downgraded has rendered UK gilts a beneficiary of the safe haven bond investor flow.

Long-term disapproval

The Chancellor is keen to lock into more cheap money and proposed in the Budget issuing ultra long-dated gilts, with terms in excess of fifty years.  He has interpreted current low borrowing rates as a sign of confidence in the coalition’s handling of the UK finances. This may prove false confidence as I see little attraction in buying such ultra long-dated paper with inflation looming.

The traditional buyers of gilts are the pension funds and it will be difficult to convince them to support an issue beyond the next thirty years unless regulation forces a compulsory purchase. Gilt yields have risen sharply since this idea was floated a week ahead of the Budget statement. The bond markets are showing their disapproval, while further healing in the eurozone is stemming the safe haven flows.

In a slow recovery credit is favoured over government debt and that is where our portfolios are positioned.



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