This week as part of our Guide to ISA Investing we reveal the top rated and top performing stock and fund ideas – as well as sharing where the experts stash their cash, the latest news from the 2017 Budget Report and how to reduce your tax bill.
Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and I'm joined today by Cyrique Bourbon from Morningstar Investment Management to discuss the latest Budget.
Hello, Cyrique.
Cyrique Bourbon: Good afternoon, Emma.
Wall: So, Philip Hammond opened with some very positive messaging about U.K. GDP and forecasts for growth, didn't he?
Bourbon: Yes, that's very true. It's fair to say he has acknowledged effectively the stronger backdrop the U.K. economy has seen in the last six to 12 months in particular. So, we've seen stronger pickup in consumption which obviously is being reflected in a bit more of an upbeat outlook for the U.K. However, worth highlighting, this strong consumption backdrop seems to be showing kind of signs of bit more of a pause. So, potential optimism should be actually quite measured in my view.
Wall: And how will that affect investors? What impact will that have on U.K. equities?
Bourbon: So, the first thing to remember is that the U.K. economy is not the U.K. equity market. So, the U.K. equity market is very global in terms of where companies are deriving their revenues and profits. So, it's very important to make the distinction between the economy on the one hand and the U.K. equity market on the other hand.
The second thing to bear in mind, which is key to us as investors, is the price you're paying for those stocks and effectively, being quite careful not to overpay for a stream of future cash flows. And our view remains that equities generally are a bit expensive, so are U.K. equities. So, we urge investors to remain quite cautious when they are approaching equity investments at this stage of the cycle.
Wall: And having a look at how the FTSE has reacted to Philip Hammond's speech, there hasn't actually been much movement. We saw banks tick up a little bit, which is in reaction to that economic forecast because they do tend to be a proxy for the economy. I did expect to see some movement in energy stocks because he did talk about potential to help the North Sea, but that hasn't come through yet, has it?
Bourbon: Yes. We are just waiting for more details on what he said about North Sea, some potential relief there. But the oil stocks, the BPs and Shells and probably Tullow, which you would expect to move, haven't moved as far as we've seen. You've mentioned the banks, they have moved a bit. That's generally a bit more of a pro-growth trade. So, not so much of a surprise.
Looking at currency, actually, given the strong growth backdrop for the U.K. in the short term, but no reaction there. Sterling is still a little bit weak compared to the dollar, a trend we've seen in the last couple of weeks, which is a continuation obviously of the kind of Brexit phase we started seeing since the middle of last year.
Wall: And there wasn't much in this budget for the investor and that's why we haven't seen the FTSE move that much. We saw some promises to spend on social care and education. That's not really something investors can get access to. There was a little bit of more details on how he plans to spend the innovation and technology budget that he announced in the Autumn Statement. But it was really just confirming a lot of what was in that Autumn Statement, wasn't it?
Bourbon: Very true. I think that's the main thing we should say and to remind people that the main Budget, obviously, we know now is going to be in the autumn and the main measures were announced back then, all the measures around the ISA allowance or corporate tax cuts, et cetera, et cetera. So, not a surprise that we didn't have too much really to kind of discuss in some ways after his statement today.
Wall: With the one exception, of course, that the self-employed have been rather hit by this budget. They will see the national insurance rate go up 1% from April 2019 to 10% and up another 1% again a year later. We also saw the dividend allowance for investors and for the self-employed who have paid through direct shareholdings would be reduced from £5,000 a year to £2,000 a year. This doesn't just affect the self-employed, however, because if you have an investment portfolio of £50,000 or more, you will see yourself impacted by this. What measures can investors take to make sure they are not hit by this tax?
Bourbon: I mean, I think, the key principle is to remain focused on maximizing your allowance in terms of ISAs and in terms of SIPPs. I mean, the rest is to keep your discipline as an investor – and this is very much my role as a portfolio manager but that is something slightly separate from the investors themselves – so for them it's really focusing on the allowances that they have. And obviously, the government announced in November that they were raising some allowances for ISA. So, this is obviously a good news. Investors should look to exploit this.
Wall: Cyrique, thank you very much.
Bourbon: Thanks for having me.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
