Why The Latest British Budget Matters, Even If You’re Not A Brit

Why The Latest British Budget Matters, Even If You’re Not A Brit
Carl Hazeley

over 2 years ago4 mins

  • The UK government has increased British workers’ wages, cut business taxes, and increased taxes on dividends, which should help support the economy through winter.

  • This has set the stage for the Bank of England to act to keep inflation from spiraling out of control.

  • Some analysts believe the way to play this is to buy the British pound ahead of any central bank announcement, and sell it once there’s a formal indication of interest rate rises.

The UK government has increased British workers’ wages, cut business taxes, and increased taxes on dividends, which should help support the economy through winter.

This has set the stage for the Bank of England to act to keep inflation from spiraling out of control.

Some analysts believe the way to play this is to buy the British pound ahead of any central bank announcement, and sell it once there’s a formal indication of interest rate rises.

The UK government released its fall budget on Wednesday, with important implications for the country’s residents, companies, and investors. But with the realization that it might be a crucial turning point for the Bank of England comes the realization that – no matter where in the world you are – there’s an opportunity to benefit here.

The government increased the “national living wage” from £8.91 ($12.24) to £9.50 ($13.05) per hour

Higher wages are almost universally positive for British workers, helping ease the financial anxiety of lower-income households and putting a new floor on overall wages that will lift all workers’ incomes over time.

What was missing, though, was any government support for households grappling with higher energy and food prices, due in part to supply disruptions.

Why should I care?

All else equal, higher wages should leave you more money to spend at the end of the month. And that extra cash could see discretionary retail stocks – i.e. those of retailers that sell things you want but don’t need – benefit the most.

The problem is, Brits’ extra money could just end up going toward covering rising energy and food prices, replacing the hoped-for boost in discretionary spending.

The government upped personal taxes on dividends

The taxes investors pay on dividends they receive will rise by 1.25 percentage points to 8.75%, 33.75%, or 39.35% depending on your current tax bracket. The government said it plans to reduce taxes in the next few years and, crucially, UK capital gains tax rates remained unchanged.

Why should I care?

UK-based Finimizers will feel the pinch directly here: you’ll be paying more taxes on your dividend income above £2,000 ($2,750). While that figure may reduce in the future, there’s no guarantee. And given this year’s focus on the highest dividend paying stocks from the Finimize Community, it’ll affect a fair few portfolios.

The government cut some business taxes

There’s a tax cut for businesses in the retail and leisure sectors (think: restaurants, gyms, bars) for the next year. That might prove invaluable, as these still-hobbled industries try to recover from the pandemic. As the CEO of leisure and hospitality loyalty platform Embargo said, “the tax cut will undoubtedly help many businesses to remain on track with their progress plan.”

Why should I care?

With coronavirus cases rising again in the UK and the winter expected to send those figures even higher, the leisure and hospitalities are most at risk. That much is clear from the recent underperformance of stocks that should benefit from a reopened economy.

Recovery stocks

Giving these companies an effective stay of execution by reducing their costs, then, should improve their recovery prospects and be good for their stock prices. What’s more, the hospitality industry is the UK’s fourth-biggest employer, so keeping it supported – and its workers in jobs – has positive connotations for nationwide employment, spending, and economic growth.

What’s the opportunity here?

If you’re not a UK-based investor, this Insight might not seem like it’s for you. But rest assured there’s an important global opportunity to be aware of.

According to the chief analyst at HYCM, the Budget has set the stage for the Bank of England’s (BoE’s) next meeting: “The big question now is whether the efforts to help ease the cost-of-living squeeze will be enough to keep inflation fears in check.”

And with forecasts from the BoE’s chief economist currently suggesting that inflation could pass 5% in the coming months, there’s mounting pressure on the central bank to raise UK interest rates to keep it in check. Investors increasingly think that will start happening in November.

As for how to play this, HYCM’s chief analyst has observed that the value of the British pound has been rising versus the euro, thanks to both “positive market sentiment” and the prospect that the BoE will dial down its quantitative easing (QE) program. But if the BoE confirms rate hikes, he’s expecting a “buy the rumor, sell the fact” response. In other words, the pound – having risen in anticipation of an announcement – may counterintuitively fall, as investors who had bet early on a rise now sell to lock in their profits.

Your trade then would be this: buying the British pound leading up to any BoE announcement, and/or selling the pound – perhaps in favor of the euro – once the central bank confirms either a reduction in QE or upcoming interest rate hikes.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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