The funds set to benefit from Liz Truss’ spending splurge

Cutting income tax, corporation tax, stamp duty and National Insurance should help companies reliant on the UK economy. 

Chancellor Kwasi Kwarteng’s “mini-budget” today is set to boost the UK economy, which will spur growth and profits for firms that rely on sales in Britain rather than overseas.

His “Plan for Growth” unveiled a wide range of tax cuts, including next April scrapping the 45% “additional tax” rate on income over £150,000 and changing the basic rate from 20% to 19% on income between £12,571 and £50,270.

He also removed VAT for tourists in the UK, cancelled the corporation tax hike, which would have seen the rate moved from 19% to 25%, and cut stamp duty.  

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This is on top of a cap on energy bills to £2,500 a year for the typical household, as well as support for business energy bills. Kwarteng said that over the medium term the UK economy could grow 2.5% annually.

This will benefit small and mid-sized UK firms, according to Dzmitry Lipski, head of funds research at interactive investors.

Laura Foll, UK equities portfolio manager at fund group Janus Henderson, adds: “The recently confirmed cancelling of the corporation tax rise that was due to come in next year will mean a boost to expected future earnings for many domestic UK businesses.

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“This earnings benefit will come at a welcome time when, given the uncertainty of the economic backdrop, there are ‘question marks’ about earnings capability in 2023 and beyond. Therefore, this boost to expected earnings could well provide a ‘cushion’ for companies at a difficult time when costs are, in many cases, continuing to rise and the demand outlook is uncertain.”

Investors can position themselves to profit, according to Lipski, by owning a FTSE 250 tracker, such as the Vanguard FTSE 250 Ucits ETF, which costs just 0.1% a year in fees. It tracks the 101st to 350th largest companies in the UK.

Such firms derive more of their profits from the UK economy compared to the extremely international FTSE 100 blue-chip index, and also employ a greater share of their workers in Britain.

This year, owing to a weak pound, which increases the cost of imports, and a struggling UK economy, the FTSE 250 index has fallen 23%. In contrast, the FTSE 100 index is off just 5%.

Lipski says active funds and trusts could also serve investors well if Kwarteng’s policies increase economic growth. Strong options, he says, are the Super 60-rated Henderson Smaller Companies investment trust and the Amati UK Listed Smaller Companies fund.

Henderson Smaller Companies trades at a 15% discount to net asset value, and through holdings such as housebuilder Bellway (LSE:BWY) and construction firm Balfour Beatty (LSE:BBY), could see an uptick in performance following the mini-budget.

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Amati UK Smaller Companies buys even smaller UK firms, and has around half the portfolio in companies with a market cap under £500 million.

Lipski says: “The team seeks management teams with a track record of success, and companies that have a high level of intellectual property and the ability to commercialise it. They avoid businesses with no clear competitive advantage and those where there are already larger rivals dominating the market in which they are operating.”

He adds that ACE 40-listed Unicorn UK Ethical Income and Super-60 Diverse Income Trust are also options for investors looking to profit from a bounce-back in the UK economy.

Kwarteng’s spending will be funded by borrowing, which investors deem bad for UK government bonds. The energy package is forecast to cost around £60 billion for the six months from October, but no other costings were revealed. 

The yield on the 10-year gilt, which moves inversely to bond prices, has risen from 0.8% to 3.7% over the past 12 months, punishing bond investors.

After the mini-budget, it jumped from 3.5% to 3.7%, reflecting investor worry about the amount of debt the UK government will have to take on and possible negative implications of all the spending on inflation.