The budget held few surprises for the markets

CHIEF MARKET STRATEGIST, CITY INDEX

YESTERDAY’S budget re-affirmed the balance the coalition government is attempting to strike between growth and austerity, while not delivering anything dramatic, largely due to the widespread leaking of many of the new measures in advance. This budget felt much like reading a novel and then seeing the movie; there was no shock, no surprise and therefore nothing of substance to trigger significant price action in the financial markets.

The focus now switches to ratings agencies, particularly Fitch and Moody’s. It will be interesting to see what their reaction will be to the budget, considering they recently placed the UK on a negative outlook, with a possible ratings cut on the cards in the not too distant future.

However, there was no real move away from November’s forecast, both in terms of public sector borrowing and GDP. As such, it’s hard to imagine there are enough grounds for ratings agencies to change their latest thinking on their UK ratings, unless the British economy’s momentum begins to subside. Does this budget impact the UK’s growing status as a safe haven investment location? Perhaps not.

SMALL CHANGES
UK GDP projections were increased marginally for this year, to 0.8 per cent from 0.7 per cent, by the Office for Budget and Responsibility (OBR), though this is no surprise given the stronger start to the year. At the same time, the OBR’s GDP forecasts for the following year remain somewhat optimistic, particularly given the sharp correction in GDP projection for 2012 from that of which the fiscal body forecast at this time last year. 2013 GDP was revised lower to 2 per cent from 2.1 per cent, while the remaining projections were left unchanged, with 2014 at 2.7 per cent and 2015 at 3 per cent.

There was slight disappointment in the latest government borrowing figures, which is expected to come in £1bn below the £127bn projection for the year by the OBR. It had been hoped that this figure could have undershot the target more significantly, although with yesterday’s release of the latest borrowing figures, it’s clear last month that borrowing was ramped up to meet forecasts. There was no change to the £120bn borrowing forecast for this new fiscal year, while 2013-14 forecasts was marginally lowered to £98bn from £100bn.

WINNERS AND LOSERS
The FTSE 100 did edge marginally higher through the duration of the speech helped in part by gains in oil stocks on the back of the announcement of £3bn worth of new field allowances to exploration off the shores of the Shetland Islands. The news helped to lift the share prices of several oil explorers as the size of the investment was a bit of a surprise.

Faroe Petroleum was one small cap stock in particular to have rallied on the back of the announcement, with the firm’s shares price gaining over 5.28 per cent on the day.

Property firms by contrast suffered weaker demand for their shares, and investors sold out of companies such as Savills after the announcement of aggressive attempts to clamp down on stamp duty avoidance for homes worth £2m and more. The announcement of a 15 per cent charge for £2m homes bought through companies was a surprise and is aggressive, while the 7 per cent new stamp duty level for homes worth £2m was already much speculated in the press. Savills shares lost 2.41 per cent as a result.