UK Budget? US election? Responding to big events

In common with most fund managers, here at Shires Income PLC we spend most days focused on the minutiae of companies but, in the short-term, external events can overwhelm company specifics. October and November have been particularly lively, with a landmark UK Budget quickly followed by a clean sweep for Donald Trump and the Republicans in the US election.

Both events have prompted a raft of speculation on the likely impact for interest rates, inflation, specific sectors and individual companies. They have both moved markets: in the UK, AIM-listed companies saw a bounce from lower-than-expected inheritance tax changes, while in the US the ‘Trump trade’ delivered a higher Dollar, rising Bitcoin and a bounce in US smaller companies. The problem is that in both cases, the longer-term outcome is still largely unclear.

This underscores the problem of incorporating macroeconomic changes into portfolio decision-making. While we can have an approximate idea of what Donald Trump may do in office – lower taxes, higher tariffs, more deregulation – the details are seldom sufficient to build an investment case for or against individual companies.

The UK Budget: difficult to make predictions

In the UK, the budget was ‘tax more, spend more, borrow more’ in its approach, but its long-term effects are difficult to judge. It appears likely to deliver a small GDP uplift in 2025, which the Office for Budget Responsibility estimates at 2%. From there, it becomes more difficult to make predictions: the budget measures should be mildly inflationary, with the uplift in National Insurance likely to be passed on in consumer pricing. Interest rates might come down at a marginally slower pace as a result. None of it is likely to move the dial for fundamental performance of holdings in our portfolio significantly.

However, that is not to say the budget measures don’t matter. The National Insurance rise, for example, is likely to have an impact on companies in the longer-term, particularly people-heavy businesses such as travel and leisure, retail, or even industrial sectors such as the housebuilders.

In turning a vague and unpredictable macroeconomic factor into a portfolio decision, we would need to look at how much of a company’s cost base comes from its labour force, how much of its business is based in the UK. We need to understand whether companies have sufficient pricing power to be able to pass higher costs on to their customers, and what can be done to mitigate the impact.

Some retailers, for example, will be able to pass on higher costs immediately. They may have customers that are relatively price-agnostic, and implementing changes is easy. Others may be caught in longer-term contracts with customers, so passing on price rises can only be done with a lag. We talk to all our companies as we make these decisions: they are often the best judge of the likely impact of external changes.

The important factor about this approach is that it is bottom-up. We try not to trade sectors and make blanket calls on what’s going to happen. Often the market will react with a ‘big picture’ view first, but then take a more nuanced view as the reality for individual companies emerges. We want to make sure we are ahead of that process.

US election: how will the Trump agenda play out?

The US election can still have an impact for the UK market. Many companies in our portfolio sell into the US market, or have US companies as part of their supply chains. The US market ‘mood’ will affect sentiment elsewhere and the strength or otherwise of the US economy is important for global economic strength. As such, the US election result matters, but it is difficult to make definitive predictions on how the Trump agenda will play out.

Certainly, in his last presidency, Trump did a lot of what he said he was going to do – he lowered taxes, implemented tariffs and sought to tackle excessive regulation. This time round he says he will, once again, implement higher tariffs, lower taxes and tackle excessive regulation. Higher tariffs and lower taxes are inflationary. This may be partially offset by deregulation. It should be good for growth in the US in the short-term, which is why US markets and the Dollar have responded positively.

Again, the longer-term is more difficult to predict. If the US runs a higher budget deficit, could government bond yields rise, raising the cost of borrowing and, potentially, depressing the Dollar? Will Trump follow through with onerous tariffs? Or is it an opening salvo for the self-styled deal maker?

Again, our response at Shires Income is to start at the company level, looking at where companies we hold have exposure to the US, and whether it is vulnerable to tariffs. For example, we think areas such as mass-market consumer goods where there are obvious US equivalents are likely to be vulnerable – tariffs will hike prices and make them less competitive. However, those with a differentiated product or technology may not be as exposed.

As yet, we haven’t moved much around in response to the budget or the US election. We’re quite defensively-positioned, so may lag a strongly ‘up’ market – as has been seen in response to Trump’s victory – but our view is that the market tends to act first and adjust more rationally in time.

In making decisions, we have plenty of resources at our disposal. We have a strong macroeconomics team that give us timely views on what a political change might mean for the economic outlook, interest rate expectations and inflation. We have access to external economists and strategists, and we also speak to companies. That all comes together in a single view. However, we are careful not to get caught up in the immediate speculation around a specific event, no matter how huge, but carefully weigh its real, long-term impact on the individual companies we hold. 

Iain Pyle is senior investment director, UK equities, abrdn.

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