FTSE remains up as Autumn Statement nears
Market steady ahead of chancellor’s Autumn Statement but managers expect difficult conditions as austerity is likely to be extended.
The UK index of 100 leading shares has stayed in positive territory this morning in spite of further austerity expected to be announced by chancellor George Osborne.
The FTSE 100 remains up nearly 0.3 per cent for the day to 5,884.7, however, has pared some of the gains from earlier in the session when it started at 5,869.
Investors have said the fact the chancellor pre-announced he will miss his own debt reduction targets for 2015-16 and therefore extend austerity measures until 2018 means the UK is looking at a “decade of belt tightening”.
“This is not a particularly palatable thought,” Andrew Morris, managing director of Signature, said.
“The pre-announcement has resulted in further calls for a change in approach from the chancellor.
“Instead opponents are advocating that he reposition polices in favour of spending, and by implication increase borrowing and push debt reduction out into the future.
“It is likely that Mr Osborne will draw on the exceptionally low costs at which the UK can borrow when defending his position.”
However, Mr Morris warned the “relative attraction” of the UK gilt market had to be seen in the context of the eurozone crisis and the US fiscal cliff, both of which could improve and put pressure on the UK’s AAA rating.
Pau Morilla-Giner, chief investment officer and partner at wealth management firm London & Capital, said the government needs to find an extra £16bn in savings in the final year of Parliament (2015-16) on top of billions in spending cuts and tax rises already earmarked.
“And with the UK having the worst deficit ratio in Europe (8 per cent of GDP), the need to reduce spending is acute,” he said.
“Tax cuts will deplete the coffers further so are highly unlikely, and tax increases will only reduce discretionary spending, thereby exacerbating poor growth – so the chancellor really is caught between a rock and a hard place.”
Mr Morilla-Giner said he expected investors would have “little choice” to continue to look at “safe yields”, corporate bonds with predictable balance sheets and UK-based companies with a track record of succeeding in emerging markets.
Kathleen Brooks, research director UK EMEA at Forex.com, said in October, the budget deficit was £8.9bn - up from £5.9bn last year which suggested a full year borrowing for 2012/13 could be £10bn more than the current £120bn target if the trend continued.
“Since the economy is not expected to pick up until late 2013, according to the latest Organisation for Economic Co-Operation and Development (OECD) estimate, then there is a high probability that tax receipts won’t recover in time to save the chancellor’s fiscal targets,” she said.
However, Ms Brooks said increasing the targets “may not be all bad news”.