The UK Autumn Budget is now less than a month away, with the fiscal event towards the end of November potentially causing volatility in the stock market. FTSE shares are likely to move depending on how investors perceive the measures announced by the Chancellor. Here are a few ways things could shift, and how I’m preparing.
Changes to consumer demand
The Budget influences consumers’ disposable income via taxes. If households feel squeezed, consumer demand may weaken. Slowing consumer demand reduces revenues for companies across retail, services, and leisure. So, I’m watching out for signs that either direct or indirect taxation could rise.
If this happens, I will stay away from domestic FTSE companies that are most sensitive in terms of needing revenue directly from consumers. Instead, I will increase my allocation to more international companies in the index. After all, their performance depends on global demand rather than just from the UK.
Economic growth outlook
With recent economic data not looking great, I expect some measures from the government to help to spark activity. One example could be to hold or even lower corporation tax, and make up this shortfall from windfall taxes on certain sectors. Stocks could also get a boost if the ISA allowance is increased.
Whatever measures are chosen to try to make the UK more attractive, there will be key winners and losers in the stock market. If it’s related to corporation tax, I will filter for companies that pay the most tax. These firms stand to gain the most.
Spending projections
A big factor will be how much the government is going to borrow moving forward and what it chooses to spend this on. Clearly, there’s a need to try to balance the books. But investors will take note of areas where the government decides to cut back on, versus sectors where spending could even increase.
For example, QinetiQ (LSE:QQ) is on my watchlist. It derives about 61% of its revenue from contracts with the Ministry of Defence. When the government signals increased spending on defence build-up or new procurement programmes, QinetiQ is well positioned to benefit from contract wins. At a company level, this translates to revenue growth and improved profit margins.
Over the past year, the share price is up 8%. Looking ahead, the defence budget could be maintained or even increased if perceived global threats are taken seriously. On the other hand, if the government tightens its belt, QinetiQ is exposed. This could be via delayed award payments, changes in procurement policy, or shifts to alternative, cheaper suppliers. Some of this impact could be buffered by revenue from other clients. But ultimately, the scale of dependence on the government can’t be ignored.
It’s too early to make a call now, but I think it’s a good example for investors to consider after the Budget announcements.
