Chancellor of the Exchequer Rishi Sunak, will present another UK Budget tomorrow. I am keenly watching out for it, considering where the economy is at. It has started recovering, but only just. And as yet, growth cannot be taken as a given. This is especially so as inflation has been on the rise, which can derail it if it gets out of hand.
So, it appears that the Budget will have to walk a fine line between encouraging growth while also raising the necessary funds in the form of taxes to pay for the mountain of government debt acquired during the pandemic. Let us talk about the potential bad news first.
Higher taxes expected
Higher taxes as we know well, are no friends of the stock markets. Increased taxes eat into companies’ net profits or consumers’ disposable income and can even be inflationary if higher taxes are passed on by companies to end consumers. We already know higher corporation taxes are coming from 2023 onwards. But before that, we can see higher taxes on specific segments as well. The FTSE 100 index seems to have found a nice footing at pre-pandemic levels this month, and I wouldn’t be surprised if there is a slight wobble if taxes are raised.
Higher capital gains tax could impact FTSE 100 stocks
There could be a capital gains tax increase, which may be a particular downer for stock markets. Volatility in the stock markets over the past year led to unexpected growth in investing activity. But tax increases can reduce the volume of transactions, at least at the margin. This too should impact stock markets.
But such higher taxes would, in particular, impact FTSE 100 stocks like Hargreaves Lansdown, which is an investment platform. It is still relatively highly priced, with a price-to-earnings (P/E) ratio of around 25 times. The fact that the FTSE 100 average P/E is at around 20 times puts this number into perspective. So, if there is a further decline in its share price, it could be a good time for me to consider buying it on dip.
Are higher duties on airlines possible?
Another sector that could be negatively impacted is airlines. The government, reports say, is ready to slap higher duties on the sector because of its environmental impact. While theoretically I can understand the argument, I would be very surprised if it gets penalised at this time. The aviation sector has been among the worst hit during the pandemic. Lockdowns ensured that air travel came to a virtual standstill. And even now, it is not back to where it was pre-pandemic. In the meantime, related companies’ financials have suffered a lot. Increased duties would push them and the sector into a deeper hole, considering that duties can be inflationary at a time when fuel prices are already rising.
Still, since this news is doing the rounds, I will look out for any announcements. In particular, I will watch out for any movements in FTSE 100 stocks like Rolls-Royce, the aero-engine manufacturer, and British Airways owner International Consolidated Airlines Group (IAG), besides other airlines. Of the two, I am more concerned by IAG right now. It has shown some improvements in passenger numbers during the summer months, but it still has massive losses to contend with.
Rolls-Royce, on the other hand, has already managed to swing back into profit. It has also been making rapid strides in winning new contracts and getting its ship in order by disposing of non-core assets. Also, some of its latest contracts have been international, so they will not be affected by any duties on UK-based airlines. However, the IAG share price could dip some more, further delaying its recovery. I have already bought the stock, and will decide my next steps after the Budget is out.
FTSE 100 consumer-facing stocks to benefit
All will not be gloom and doom though. At the macro level, there is expected to be an upward revision to the national minimum wage. More money in the hands of people means more spending. So we could expect a rise in consumer expenditure overtime, which can be good for FTSE 100 stocks from grocers to non-essential retailers and even food delivery companies. Specifically, I will look at the reactions regarding stocks like Tesco, JD Sports Fashion, NEXT and Just Eat Takeaway on Budget day.
Other than Just Eat Takeaway, these stocks have done quite well in the recent past, reaching multi-year highs, if not all-time-highs. And the economic recovery has made their prospects even better. As far as Just Eat Takeaway goes, I reckon it is undergoing a prolonged correction following the easing of lockdowns. The stock did particularly well last year as consumers rushed to order-in. Even now, its growth is strong though, which makes it a stock for me to consider buying now too, perhaps even more than those others that have already run up.
Clean energy push
At a sectoral level, clean energy could get a bigger push on Wednesday. As I was saying earlier, this could partly be through higher duties on airlines. But especially with fuel prices at scorching highs, there could also be a bigger push towards electric vehicles (EVs). FTSE 100 stocks like Johnson Matthey, which produces chemicals used in EV cells, and Rio Tinto, which has found lithium deposits, may be beneficiaries of this.
This could be good news for both stocks, which have corrected sharply in the past few months. Rio Tinto, in particular, looks exceptionally cheap to me due to a host of factors including an expected slowdown in metal prices. A fillip to EVs can be just the impetus it needs to start rising. I have already bought it, but if I had not, I could well do so now.
Besides this, more generally, I reckon the Budget could give a push towards clean electricity, in line with its targets for 2035. Based on this, I think FTSE 100 stocks like SSE can benefit, since it is a big clean energy producer. I think it is a stock for me to buy anyway, but the Budget may just be the push I need to actually buy it now.
Manika Premsingh owns shares of International Consolidated Airlines Group, JD Sports Fashion and Rio Tinto. The Motley Fool UK owns shares of and has recommended Next. The Motley Fool UK has recommended Hargreaves Lansdown, Just Eat Takeaway.com N.V., and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.