Chancellor Rachel Reeves’ Budget was big: it raised £40bn in taxes, took on an additional £28bn in borrowing, and made significant spending commitments to education and health. However, for the most part, its key measures were not a surprise.
Almost all of them had been tested with the market ahead of time. As such, UK bond, equity and currency markets have avoided any extreme swings in the wake of the chancellor’s announcement.
Within equity markets, perhaps the most notable movement has been in the FTSE Aim market. Share prices for the UK’s smallest companies have been held back by fears that the chancellor would abandon the inheritance tax breaks for holding Aim shares.
As it was, she raised IHT on Aim shares, but only to 20 per cent. That means it is still a valuable IHT planning tool for many investors. The Aim market, which had been expecting worse, rose 4 per cent on the day, though has dipped back a little since.
Anthony Cross, manager of the Liontrust UK Micro Cap and UK Smaller Companies funds, says: "With interest rates reducing, growth returning, a stable government and this question now resolved, we believe the headwinds that have been plaguing Aim have now turned into tailwinds.
"Year to date (including today’s move) the FTSE Small Cap Ex-IT is up 11.5 per cent vs Aim down 2.6 per cent – at the very least we would expect this gap to continue to narrow."
Alexandra Jackson, manager of the Rathbone UK Opportunities fund, is equally optimistic: “Crucially, it gives certainty to Aim investors. We think after this cut it’s unlikely this issue will be revisited again this parliament and should allow the index to return to a more fundamental-driven era.
"The Rathbone UK Opportunities fund has 10 per cent of assets invested within the Aim market. In general, small and mid-caps are markedly outperforming large caps, as markets digest the Budget.”
Nevertheless, Abby Glennie, manager of the Abrdn UK Mid-Cap Equity fund, says that tax hikes on smaller companies still goes against the growth agenda that the new government hopes to promote.
“UK smaller companies have been battered by a decade of difficulties, from the collapse of their natural investor base (UK pension funds) to increasing regulation, so now is the time to be looking at how we can support them, not pull the rug out from under them," she says.
"Aim aligns with the rhetoric on investing in growth and innovation, and the tax cuts on IHT here go against supporting external capital investment in this area."
She says the quality and growth dynamics remain strong and competitive, the problems are external. With the right policy conditions in place, she believes this part of the market could thrive, but they were not created by this Budget.
The other equity sector likely to see an impact from this Budget is the energy sector. The government has made a clear commitment to decarbonisation, which has included a package of support for renewable energy.
