Did the Chancellor blow his lines?

We have just seen what is, most likely, the last Conservative Spring Budget for a while and have been left wondering whether the Chancellor really did miss an opportunity to provide a major boost to the UK equity market and the fortunes of those companies within it.

His announcing of the British ISA and the limited pension fund reforms don’t seem to have moved the market. After what we had been told by various senior “City” figures that there was a real desire by the government to reinject life back into the moribund stock market, it has felt rather disappointing.

Firstly, the ISA proposal – the idea that people can invest £5,000 into UK assets (which we assume means equities), in addition to the £20,000 per year that they can currently invest in cash, stocks and shares via an ISA, seems to have missed the point. It was meant to reinvigorate the UK’s troubled stock market, but it will only appeal to those investors who have utilised the maximum allowance, have more money to invest and then want to put that additional money into UK equities.

According to the Financial Times, in 2020/21 only about 15%* of ISA subscriptions were for the full amount. The vast majority of savers don’t get anywhere close to the maximum allowance and so this proposal doesn’t look like it has gone far enough to encourage the consumer to support their home market. Apparently, there will be a consultation on this proposal until 6^th June, so there might still be the opportunity to amend some of the detail.

Perhaps the more significant development in the Budget, however, was the announcement that the Chancellor will introduce new requirements for defined contribution and local government pension funds to publicly disclose their level of international and UK equity investment. This reflects the rather eye-catching underweight to domestic equities in the UK, compared to the level of domestic weights by pension funds in other countries. According to data from the Capital Markets Industry Taskforce, and referenced in a recent report by city firm Panmure Gordon, in December 2023 the average UK Pension has just 2.8% invested in UK equities. In comparison, other nations such as France, Italy, Japan and Australia have close to 40% in their home equity market.

This appears, therefore, to reflect a meaningful hardening of rhetoric from the government and could clearly have the potential to be game changing over the medium to longer term.  Pension schemes have almost £1trn of assets**, so even a 1% shift in asset allocation implies £10bn of potential flows. Moving to a weight similar to those other countries would be more meaningful still.

Whilst the announcements made in this Budget are far from a ‘Big Bang’, they are at least acknowledging the problems facing UK markets. It is now up to the financial services industry to build on these proposals and continue to keep up the pressure through continued engagement with policymakers.

A number of our fund managers feel that it will not take much to turn the tide for the UK markets and let’s hope that more will be done through the coming consultation period and that we see once again a healthy UK stock market. We will continue to monitor developments and hope for better news to come.