What might the Autumn Budget mean for investors?

There are pockets of opportunity in the UK’s investment markets despite ongoing challenges to the economy, but headwinds remain which should be carefully managed in portfolios.

Britain’s economy has shown some resilience in the face of a weakening labour market, slow economic momentum and high fiscal debt. Robust savings have helped offset these headwinds and the economy, though slowing, has continued to grow.

However, with government borrowing hitting £18 billion in August — a five-year high and well above forecasts — Chancellor Rachel Reeves has a difficult task trying to plug the fiscal gap in her upcoming Autumn Budget. 

At Coutts we are neutral on UK equities, mindful of the current challenges. Our portfolios favour US equities, buoyed by robust earnings and the potential of artificial intelligence, and Japanese equities where shareholder-friendly reforms are gaining traction.

We do still see attractive opportunities in the UK domestic space though, which is reflected in our portfolio positioning. Our investment approach has aimed to manage current conditions in two key ways.

• We increased our allocation to sterling versus the US dollar. We did this when sentiment in the UK was low. This contrarian move rewarded portfolios as sterling has strengthened against a US dollar hampered by expensive company valuations and policy uncertainty.
• We adopted an active stock picking approach. We use an active fund manager who seeks out specific opportunities within the UK with a particular focus on domestic businesses.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. 

UK government bonds — or gilts — have experienced volatility due to fiscal concerns, with 30-year yields reaching their highest levels since 1998 (prices fell). This is not unique to the UK. Similar trends are evident across developed markets amid elevated fiscal debt.

Our government bond holdings at Coutts tend to be concentrated closer to the 10-year maturity mark, so we haven’t been hugely affected by this. Despite the recent headline-grabbing 30-year figures, we continue to value bonds for their diversification benefits and reliable income.

However, in the current climate we believe further diversification is prudent, which is why we have our exclusive liquid alternatives fund within our more defensive mandates. We set up this fund with J.P. Morgan Asset Management to focus on areas with low sensitivity to traditional stock and bond markets. It has been beneficial, outperforming global government bonds so far this year.

We remain vigilant and will continue to monitor the UK market — indeed all markets — in the run-up to the Chancellor’s Autumn Budget and beyond.

We stand ready to adjust our holdings accordingly at the appropriate time, in line with our disciplined Anchor and Cycle investment approach — as outlined in our Mid-year Investment Outlook earlier this year — which blends long-term conviction with tactical agility.

It’s worth noting that, while headwinds persist, so does the potential for opportunity. Despite the Chancellor’s formidable task and fierce fiscal challenge, we may well see the resilience that has characterised the UK economy this year continue.

This article should not be taken as advice.