Chancellor to declare the winners and losers

WITH tax rises and spending cuts expected in today’s Budget, many equity strategists are advising investors to steer clear of stocks heavily reliant on UK-based revenues. Instead, contracts for difference (CFD) traders should target equities with international and private sector exposure.

The emergency Budget is likely to focus on tax rises instead of detailed spending cuts (which will be specified in the autumn), with a probable Vat hike to 18.5 or 20 per cent likely to hit UK-faced retailers like Marks and Spencer and Next hardest. But given that the market expects a rise, it is likely to have already been priced in. By contrast, most analysts are not anticipating the removal of Vat exemptions on food and non-alcoholic drinks, so if Osborne springs a surprise in this area, expect UK-focused food retailers like J Sainsbury and Morrisons to suffer.

The UK banking sector, meanwhile, is awaiting details of a promised bank levy. Despite
populist pressure to collectively punish the banks, details of the tax could actually improve the sector’s prospects. In a note last week, Deutsche Bank argued that it is uncertainty about the tax that has contributed to banking equities being oversold: “We see some chance of a pragmatic approach which, combined with depressed valuations, could see upside for the sector once certainty is had.”

Building contractors are expected to have mixed fortunes. While it might take until the autumn for spending cutbacks to affect the bottom line, share prices are likely to factor in cuts much sooner. The worst to suffer, says Numis Securities’ Howard Seymour, will be companies reliant on British public sector contracts. He says: “About 80 per cent of what these companies are doing is in the public sector now, partly because the private sector has really been hit badly.” That includes Costain Group and Morgan Sindall Group.

Those which have expanded into building services, however, such as Carillion and Kier Group, will be relatively insulated. Seymour explains: “They don’t just build the facilities; they also run them.”


He also places Balfour Beatty in this bracket, although analysts at RBS disagree, seeing the firm as a likely loser. Other firms that stand to win from government cuts are those placed to take on services that the government outsources to the private sector. RBS rates Serco and Capita as likely beneficiaries here while both Numis and Deutsche advise investors to sell Hays due to its dependence on revenues from public sector recruitment work. IT services also stand to lose as new projects are cut back, with Logica particularly vulnerable.

Not all analysts agree, however, that today’s Budget will cause a slowdown in domestic-facing equities. Henry Dixon of Charles Stanley’s Matterley Fund argues that hopes are so low that hearing the details could actually calm market fears about how bad an austerity budget will be.

While that might be true for private sector-facing firms in the long-run, it is hard to see how firms heavily reliant on public spending can avoid being hit. Investors would be well-advised to reduce their exposure quickly.