The FTSE 100 index is close to setting another all-time high. But this apparent enthusiasm among investors doesn’t seem to reflect concerns about the wider economy. Inflation is stubbornly high and growth is slowing. Worse, the Chancellor’s expected to have to find up to £30bn of tax rises to stick to her own fiscal rules.
Many years ago, it was customary for there to be a period of silence before any Budget. Nobody would say a word about what was (or wasn’t) to be announced. Nowadays, there’s a constant flow of Treasury leaks and off-the-record briefings as to what the Chancellor might do to fix things.
Some of this is probably testing the water to gauge public opinion. Or it could be designed to throw everyone off the scent. But whatever Rachel Reeves announces, most members of the FTSE 100 are likely to be affected, but not necessarily everyone.
| Sector | No. on the FTSE 100 |
|---|---|
| Banking, financial services, and insurance | 23 |
| Industrial goods and services | 18 |
| Retailing and personal care | 9 |
| Energy and utilities | 8 |
| Media and leisure | 8 |
| Mining | 6 |
| Telecoms and technology | 6 |
| Food, beverages, and tobacco | 6 |
| Consumer goods | 6 |
| Healthcare | 6 |
| Real estate and construction | 4 |
| Total | 100 |
Business as usual
For example, miners’ earnings are largely influenced by global commodity prices and not by UK government policy.
It’s also worth remembering that nearly all Footsie members generate the majority of their revenue overseas giving them some protection from a sluggish British economy.
And as tempting as it might be, I can’t see the Chancellor increasing the energy profits levy. BP and Shell already pay an eye-watering tax rate of 78% on their North Sea earnings. However, the five banks on the index might not escape a windfall tax being imposed on them.
There’s also talk of other tax changes. Entain has warned that job losses could result if betting duty is increased significantly. And retailers will suffer if the burden of commercial rates is shifted from smaller stores to larger ones.
More to gain
But housebuilders, including Persimmon (LSE:PSN), could be the winners. Gilt rates should fall if the markets are convinced by the Chancellor’s sums. This will help increase mortgage affordability and boost demand for new properties.
If it’s true that stamp duty’s going to be replaced with a new national property tax on £500,000+ homes, Persimmon — with an average selling price of £284,047 — could be a major beneficiary.
However, if the Budget goes badly, interest rates might not fall as fast as anticipated and the housing market could remain stuck in the doldrums. Also, supply-chain inflation means the group’s making less per house than before the pandemic. It therefore needs to sell more just to stand still.
However, analysts are optimistic. They are forecasting a 37% increase in earnings per share over the next three years. Encouragingly, the group’s order book was £1.25bn at 30 June. And it had no debt on its balance sheet.
It also offers (no guarantees, of course) an above-average yield of around 5%. On this basis, although the market remains challenging, I still think long-term investors could consider the stock.
Resilience
Since the FTSE 100 was established in 1984, its members have had to deal with numerous fiscal events. There’s also been plenty of uncertainty brought on by the global financial crisis, Brexit, Covid-19, and US trade policy.
And yet the majority have continued to deliver sustained growth in earnings. This is a testimony to their strong balance sheets, impressive brands, and global reach. I’m sure this will continue regardless of what’s announced on 26 November.
