31 October 2018

Generous give away or sleight of hand?

With meaningful news somewhat sparse at present, Brexit aside of course, the last Budget before we leave the European Union has given us something to think about.

Not that Philip Hammond’s measures have had much effect on the stock market. Overall investors seemed to shrug aside what appeared to be a more generous set of changes that might have seemed possible, given recent economic indicators. In fairness, there was little in his statement that is likely to have a significant impact on individual sectors of the market. The digital services tax is impossible to assess in terms of effectiveness, while taxing plastic could take years to bring in properly.

Anyway, much still rests on the nature of the deal we conclude with the European Union, always assuming that the government can get it through Parliament, of course. If the Budget did have a hidden agenda, it must be to try to help the Prime Minister to rally her party behind whatever leaving terms we agree with the rest of Europe. It was interesting to hear Labour’s shadow chancellor say that he would keep the changes to personal allowances and the higher rate threshold were he to be in charge of the Exchequer.

Elsewhere, the decision of Angela Merkel to step aside may have profound implications for the future of Germany in particular and thus Europe as a whole. But company results are thin on the ground and it is too soon to get any meaningful economic statistics relating to the end of October. The fact that the Office for Budget Responsibility has granted the Chancellor more headroom is a plus, while at least some more positive noises are coming out of the White House regarding a trade deal with China. Then again, Chinese equities have shed 30% this year.

Presently shares appear to be in what might be termed correction territory. In other words, they have shed sufficient to restore more appropriate valuation levels, but not enough to suggest we are in a bear market. Emerging economies aside, we have seen around 10% wiped off the value of leading stock markets, or roughly half the fall that is deemed to constitute bear territory. The trouble is that markets always overreact – in both directions.

In the end, it will all be about investor confidence. A reasonable Brexit deal duly passed through Parliament and a settlement to the trade war between China and America would do much to restore sentiment. There is always the danger of the unexpected, of course, and such events are more likely to have a negative impact than a positive one. The future is as opaque as ever and we’ll just have to wait and see.

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