The chancellor has set out his ‘make or break’ Autumn Budget, including many tax and spending initiatives, but there was also plenty of headline economic data for investors to consider.
A key takeaway was the Office for Budget Responsibility’s (OBR) revised UK growth forecasts. Rises in gross domestic product (GDP) are now predicted to come in at 1.5% for this year and 1.4% in 2018, down from previous predictions of 2% and 1.6%.
The growth is expected to slip further to 1.3% in 2019 and 2020, before picking up gradually to 1.5% in 2021 and 1.6% in 2022. However, with Brexit on the horizon, it is unwise to read too much into these forecasts. For context, in March last year – prior to the EU referendum – the OBR predicted growth of 2.2% in 2017 and 2.1% in 2018.
An international perspective
Still, these downbeat economic forecasts have little bearing on the outlook for UK investors, particularly those invested in UK equity markets. For instance, the Omnis UK Equity and Omnis Income & Growth funds both have sizeable investments in the FTSE 100, the UK’s pre-eminent stock exchange which houses the country’s largest listed companies.
The success of these blue-chip companies is in most cases not-linked specifically to developments within the UK, but rather trends within the global economy, particularly high-growth regions such as the emerging markets of Asia.
David Docherty, manager of Omnis UK Equity Fund, said: “The UK equity market appears to have taken the Budget in its stride with investors seemingly unsurprised by the chancellor's reduced forecast for GDP growth”.
Neil Woodford, manager of Omnis Income & Growth Fund, said the chancellor had delivered a “politically shrewd and economically appropriate” Budget bearing in mind a more cautious perspective on productivity.
He said: “The OBR now appears to be forecasting a sustainable growth rate for the UK economy of circa 1.5% over its forecasting horizon. As well as the explicit caution in its assumptions around productivity, there is also appears to be some implicit caution around the impact of Brexit on the UK economy.
“My own belief is that the UK economy can do better than what has been forecast by the OBR – I expect UK economic growth to be in the region of 2% per annum over the next three-to-five years.”
The inflation picture
The chancellor also outlined the ORB forecast for inflation to peak at the current 3% rate this quarter, then beginning to fall back next year closer to the Bank of England’s 2% target.
Colin Gellatly, deputy head of investments at Openwork Wealth Services Limited, believes that a fall in inflation would mean less pressure on the Bank of England to raise interest rates (currently at 0.5% following a rise earlier this month).
He said: “The OBR’s inflation forecast acts as a loosening of the pressure release valve for UK policymakers. This may be good for bonds as any rises in interest rates would be expected to push prices down.
“In the absence of higher interest rates, we also expect sterling to remain relatively weak in the near future, which is good news for UK-listed exporters held in Omnis funds as their prices will remain competitive.”
Whichever the twists and turns of the UK economy, a well-diversified approach to asset allocation, such as offered by the Omnis Managed Portfolio Service, will help defend and grow the value of your portfolio through market cycles.
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