The government is coming under increasing pressure regarding fiscal policy moves, which include taxation and public spending. The issues could spill over into higher government debt, higher bond yields, and budgetary tightening. This could then put pressure on both individuals and UK stocks. Here are two stocks that I’m being cautious about right now, as a result.
Pressure on mortgage rates
The first one is Barratt Redrow (LSE:BTRW). The UK construction stock is down 9.5% over the past year, but I’m concerned about it going forward. Fiscal issues often lead to higher government bond yields, which in turn influence mortgage rates. Higher mortgage costs dampen housing demand. This could translate to Barratt being able to sell fewer homes as people struggle to afford the higher rates.
There could also be concerns that the government might tighten its belt when it comes to support for first-time buyers. This could further reduce affordability and demand, negatively impacting Barratt.
Another problem that Barratt faces is that even if fiscal problems don’t escalate, any slowdown in the economy could see the stock move lower still. If people feel uncertain about the state of the economy (whether realised or imaginary), it can cause them to cut back on large purchases.
My worries around Barratt could be misplaced. The latest trading update spoke about the integration between Barratt and Redrow going well, with the newly formed business “making good progress on both cost and revenue synergies”. This could act to drive share price optimism going forward.
Reduced support
The other company is BT Group (LSE:BT.A). The FTSE 100 stock has risen 40% over the past year and is currently near its highest level in three years. This is great, but I don’t feel now is a good time for me to buy the stock.
BT benefits from government investment in broadband rollout (mainly rural fibre). Fiscal tightening may soon slow or reduce this support. Even though infrastructure is a priority for any government, funding cuts may be necessary to avoid higher taxes.
A friend of mine made a good point that, to provide some good news for customers, regulatory bodies influenced by the government may resist allowing telecom price increases. Although this would be beneficial to the person on the street, it would harm BT’s margins.
Investors might overlook these points and instead focus on the positive efforts being made to reduce costs and streamline the company. The CEO noted in the latest quarterly results that the “benefits from our cost transformation more than offset lower revenue outside the UK and weak handset sales”.
This is a promising sign, but until there’s a little more certainty, I’m still inclined to sit on my hands. I may be wrong about my view on future fiscal policy moves, but it’s something that I believe all investors should keep an eye on in the coming months.
