The impact of the emergency Budget on equity markets has been obscured by the crisis in the eurozone.
However managers believe the key to performance will be the strength of the US recovery.
PSigma’s income manager Bill Mott says: “Unknowns in relation to the global market remain in place, and, with regard to equity markets, the action taken in the Budget was well-known – there were no surprises.
“More important is the US, the dynamics in Europe, and whether emerging markets will grow faster than developed markets. The outlook for markets over the next few years has never been more influenced by political factors.”
Mott says as there are several issues still uncertain, and only the Government’s autumn spending review will provide greater clarity.
“One thing that will be key to the UK is whether the populace will go along with the spending review,” he says.
Looking to the future for the UK, Mott says he expects companies with a large part of their earnings outside the domestic market to be favoured by investors. “But it depends on how willing the UK consumer is to make the adjustment and move into the next stage of the cycle,” he adds.
Meanwhile, uncertainty remains around UK banks, despite Osborne’s new levy on the sector being less hard-hitting than some expected.
“UK banks are very difficult to value at the moment,” Mott says. “They will remain volatile and will not necessarily drive the market.”
Colin Morton, a large-cap specialist at Rensburg, also emphasises the role the US and the rest of the world will play in maintaining growth in the UK.
“Investors realise we are in for a tough period of growth,” he says. “The one area still powering ahead is the US. While Europe and the UK have cut spending, the US is still in full spend mode.
“We are hoping the US will help the world’s economy keep growing.”
At the sector level, Morton says he has been steadily reducing exposure to consumer-facing stocks including retailers and housebuilders, concentrating instead on overseas earners exposed to the US and emerging markets.
However, other managers suggest the UK retail sector reacted positively to the Budget, largely because the increase in VAT from 17.5% to 20% will not be implemented until 2011.
Jane Coffey, head of UK equities at Royal London Asset Management, says: “There were fears the VAT rise would be immediate and spread to a broader range of products, which was not the case. From our perspective, we are still underweight the sector as we think there are still a lot of headwinds.”
However, Coffey remains cautious on the banking sector, because the full range of taxes on the industry was not announced in the Budget.
“The smallprint said the Government is still looking at other action to take, so we are still nervous on banks,” she says.
“Another area where it could go bad is property. Our property specialists say 50% of commercial property in the north is let to the Government and quangos.
“With the cuts expected in public services, this could have a real impact.”
