Peter Wasko, Senior Portfolio Manager, Copia Capital

In what is likely to be the last Autumn Statement before the general election, Jeremy Hunt packed over 100 measures into his House of Commons address. They covered headline-grabbing changes to National Insurance and workplace pensions as well as adjustments to benefits, planning rules, business rates, capital allowances and more.

It was labelled a Statement for Growth, and a key aspect was Backing British Business. Here we look at what the Chancellor said and the likely impact on UK investments.

Economic resilience, but a gloomy outlook
The Chancellor was quick to point out the good news from the Office for Budget Responsibility (OBR): the UK economy has recovered faster from the pandemic and the energy crisis than expected back in March. He said UK GDP growth has also been more resilient than Germany, Italy and the Euro area as a whole.

However, these positives were tempered by the OBR adjusting its forecast for future growth downwards from 1.8% in 2024 and 2.5% in 2025 set in March to 0.7% and 1.4% now due to concerns about inflation . Despite inflation slowing more than expected in October, thanks to lower energy prices, the OBR believes it will be more persistent and take longer than previously anticipated to come back down to the Bank of England’s target of 2%.

The soaring inflation we saw last year was largely driven by rising energy and food prices, fuelled by the war in Ukraine. These global inflationary pressures are coming down, which is why we’re seeing inflation falling across all regions. Now UK inflation is more domestically driven, with strong wage growth impacting the cost of goods and services produced in the country and the OBR believes this will take longer to bring under control. As a result, we’re likely to see interest rates remain higher for longer. While we think we are pretty much at the top of the rate cycle now, following speculation that interest rates will fall in early 2024, the governor of the Bank of England warned in November that rates will not be cut in the ‘foreseeable future’.

If rates remain high for an extended period, it is likely to create a headwind to economic activity. Businesses face higher borrowing costs if rates remain high for longer, as do their customers. So far consumer demand has proved resilient to the rate hikes, but as more households on fixed-term mortgages reach the end of their deals it’s likely that higher interest rates will have an impact on spending and ultimately corporate earnings.

High wage growth has also supported continued UK consumer spending to date, but we may be seeing the first signs that growth has peaked. The Office for National Statistics’ (ONS) latest figures put annual growth in regular pay (excluding bonuses) at 7.7% in July to September 2023 . This is slightly down on previous periods, although it remains among the highest annual growth rates since records began in 2001.

There are also suggestions that the labour market is loosening, with the ONS data showing job vacancies falling in August to October 2023 across all but two industry sectors . If employers can fill positions more easily, the pressure to increase pay will reduce and as wage growth slows, inflation should also decline. However, the Bank of England has a difficult balancing act to perform in keeping rates high to control inflation without weakening the economy further.

Backing British Businesses
With this less-than-rosy economic picture, the Chancellor’s Autumn Statement included several measures aimed at encouraging business growth.

Announcements included creating a permanent tax break on the cost of qualifying plant and machinery investment. Temporary rules to this effect were due to end on 1 April 2026, which critics argued would simply bring investment forward, rather than achieving the aim of increasing capital stock. The OBR forecasts that making the policy permanent will increase business investment by £14 billion over the five years to 2028-29.

Mr Hunt also followed up on his Mansion House speech in July with plans to incentivise investment from pension schemes and the insurance industry in high-growth businesses and infrastructure. Government estimates suggest the reforms could increase business investment by £2 billion per year in the long run.

The government is also making more public funding available for innovative companies and specific manufacturing sectors including automotive, aerospace, life sciences and clean energy.

The outlook for UK firms
Setting out measures to support the long-term growth of UK companies is certainly to be welcomed. However, few results will be seen before the next election and how many of these policies will remain in place beyond then is anyone’s guess. Possibly as a result of this uncertainty, there was little reaction in the markets to the Statement.
More generally though, although the recent environment has been challenging, we are becoming more positive about the outlook for UK equities. At Copia we tend to favour value over growth and UK companies are now starting to look appealing from a valuation perspective. They are cheap compared to historic averages and also relative to other regions.
We also prefer income over growth, so the work that UK corporates are currently doing around share buybacks, dividends and special dividends is particularly interesting. In the current high-interest environment, companies are clearly thinking about cash flow, which is important for investors as income is a significant portion of total returns in the UK market.
Another point to note is the amount of M&A activity. In a high-interest rate environment, you’d expect fewer deals to happen due to uncertainty over the cost of capital. However, so far in 2023, there have been more than 30 deals over £100 million, primarily private equity buying UK-listed companies. This suggests that although the public markets are not recognising the value of UK companies, private equity certainly is and is willing to pay a premium for good companies with good cash flows.
Diversification remains crucial, but taking current valuations, M&A activity and the focus on cash flow into account, we believe there is good cause for optimism in terms of what will be delivered by the UK equity market looking forward.

This article is intended for professional advisers only. Not to be distributed to, nor relied on, by retail clients. Past performance is not an indicator of future performance and current or future trends. Copia does not provide advice, advisers must seek their own compliance/legal advice before relying on the information provided in this article.