Chancellor Kwasi Kwarteng’s mini-budget caused mayhem in financial markets:
- The pound went into freefall.
- UK government bonds (gilts) were heavily sold off.
- And the Footsie stock index ended the day deep in the red.
Why was Kwarteng’s mini-budget so badly received? Which FTSE sectors and stocks were worst hit on the day and which were the biggest gainers? What should investors do now?
Tax cuts galore
On top of the government’s previously announced multi-billion pound scheme to subsidise energy bills, the chancellor unveiled a raft of tax cuts — the biggest tax giveaway in half a century.
We had a reversal of the rise in National Insurance introduced by his predecessor, Rishi Sunak. The abolition of the highest rate of income tax. An axing of the cap on bankers’ bonuses. The scrapping of a planned rise in corporation tax. And a big uplift in the stamp duty threshold.
Risky gamble
Investors and traders appear to have viewed the government’s heavily debt-funded plans as an abandonment of fiscal discipline for a risky gamble on jump-starting economic growth.
To put the financial markets’ response into some perspective, the pound slumped to a new 37-year low against the dollar ($1.08), with some analysts predicting it could go on to fall to parity for the first time in history. Meanwhile, the tailspin in the bond market saw some of the biggest one-day negative gilt price moves in decades.
Falls of 2% for both the FTSE 100 and the more UK-focused FTSE 250 may not have been quite as dramatic, but they rounded off an overall negative response to the mini-budget across financial markets.
Big fallers
Not all UK equity sectors and stocks were down on the day, but let’s begin with the big fallers.
One striking feature was the number of real estate investment trusts (REITs) on the fallers’ board. FTSE 100 giants Land Securities (-5.9%), Segro (-4.5) and British Land (-4.4%) were there. As were a host of mid-cap FTSE 250 real estate firms, including Warehouse REIT (-8.3%), Tritax Eurobox (-8.3%) and Urban Logistics REIT (-7.1%).
It’s been said that REITs can act as bond proxies, and that the slump in these stocks reflected the hammering taken by government bonds.
Elsewhere in the property space, FTSE 100 housebuilders Barratt Developments, Berkeley Group, Persimmon and Taylor Wimpey, which initially rallied on the stamp duty news, soon fell back to end the day underwater. Online property portal Rightmove (-4.5%) also suffered.
Global fears
Oil heavyweights BP (-5.5%) and Shell (-5.3%) sank as the oil price fell to levels last seen before Russia’s invasion of Ukraine. This on fears not only about the UK economic outlook, but also the prospects for other major economies, like the US.
The same fears sent mining companies’ shares down. Anglo American (-5.9%), Antofagasta (-5.9%) and Glencore (-5.8%) joined BP and Shell on the FTSE 100 top 10 fallers list.
The FTSE risers
A big theme on the risers board was the prominence of stocks in the healthcare sector. This sector is considered ‘defensive’ — largely shielded from fluctuations in the wider economy.
Shares of AstraZeneca (+0.8%), rival pharma firm GSK (+1.3%), and the latter’s recent consumer health spinout Haleon (+4.3%) were in demand. And the theme continued among FTSE 250 stocks, with private hospitals specialist Spire Healthcare Group (+1.1%), Worldwide Healthcare Trust (+1.1%) and Hikma Pharmaceuticals (+0.8%) all on the mid-cap top 10 risers list.
Investment companies
Another theme among the FTSE risers was the prominence of investment companies focused on the economic growth potential of Asia and emerging markets. These included Fidelity China Special Situations (+1.3%), VinaCapital Vietnam Opportunity Fund (+0.6%), Schroder Oriental Income Fund (+0.6%) and Templeton Emerging Markets Investment Trust (+0.6%).
There was even greater demand for hedge-fund-style investment companies with strong records of making money in times of uncertainty. Pershing Square Holdings (+1.6%) was the FTSE 100’s fourth-biggest riser and BH Macro (+4.1%) topped the FTSE 250 leaderboard.
What should investors do now?
First, I think it’s worth noting that the FTSE 100 fell below 7,000 during mini-budget day. This compares with an all-time high of over 7,900 in May 2018. If history is any guide, the FTSE 100 will sooner or later reach and surpass that previous high.
Second, the mini-budget day risers and fallers are a reminder that all sectors have their days in the sun. But by buying discount shares of diverse, well-managed businesses — often in times of uncertainty — investors can raise the overall potential of their long-term returns.
