The Autumn Budget: not much to shout about?
We had, rather optimistically, reserved the front page of this month’s Bulletin for the Autumn Budget, expecting a major fiscal event to give us plenty to talk about. However, having worked our way through the announcements, we may struggle to fill the page with quite as much drama as we anticipated.
After the significant changes announced in recent Budgets, particularly around Inheritance Tax and Pensions, perhaps a quieter set of announcements is not such a bad thing. For financial planning though, there are still some important messages worth absorbing.
One is the growing importance of making full use of tax-efficient allowances, particularly ISAs and considering how best to hold your cash reserves. Savings interest has become a more meaningful source of income as interest rates have risen in recent years. The downside? More savers are finding themselves with a tax bill on interest that they might previously have received tax-free.
From April 2027, the basic rate of tax on savings interest is set to rise to 24%. Put simply, a savings account paying 4% gross would deliver a return of around 3% after tax (net), for a basic-rate taxpayer whose interest is fully taxable at that rate and that is before we even consider inflation. If the cost of living is rising faster than the return on your savings, the spending power of your money is still being eroded.
It makes the case for reviewing where your cash is held, how much you really need readily accessible and whether you are making the most of the allowances available to you. Cash has an important role to play in a financial plan, but it is worth remembering that the highest headline interest rate does not always translate into the best after-tax (net) outcome.
And what of Pensions? For years, speculation about changes to Pension tax-free cash and allowances has become an almost annual feature of the Budget build-up. There was no major change to the tax-free cash rules announced this time. For Inheritance Tax purposes, however, the clock continues to tick towards the planned inclusion of most unused Pension funds within an Estate with effect from April 6th 2027. We have been helping clients understand what the changes could mean for their families and considering the options available to them. As ever, the right answer will depend on individual circumstances.
The economic forecasts offered little cause for celebration either. The latest projections suggest UK economic growth of 1.2% this year, slowing to 1% in 2027 before recovering to 1.6% in 2028. Against an inflation forecast of 3.4% for 2027, it is hardly a picture of an economy firing on all cylinders and, as a Council Tax Band D property owner, I shall gratefully accept the £100 contribution towards my energy bill. It should go some way towards the annual cost of around £2,500 — and perhaps leave enough change to buy a jar of gherkins. As the advert reminds us “every little helps!”
Joking aside, the Budget may have been quieter than expected, but the wider economic backdrop remains challenging and that brings us, neatly, to the markets.
Markets remain remarkably resilient
Against this backdrop, investors might reasonably have expected equity markets to struggle. Geopolitical tensions, inflation, Government borrowing and the prospect of higher-for-longer interest rates are hardly a recipe for carefree investing, yet markets have remained remarkably resilient.
The FTSE 100 has returned around 11% so far this year, while global equities, as measured by the MSCI World Index are up around 12%.
At first glance, that might seem at odds with the headlines, but markets are not simply reacting to today’s news. They are constantly trying to anticipate what the world — and more importantly, company profits — might look like several years from now.
That helps explain why concerns about Government borrowing, geopolitical uncertainty and interest rates do not automatically translate into falling share prices. If companies continue to grow their earnings and investors remain confident about their longer-term prospects, markets can look through a considerable amount of short-term uncertainty.
Of course, resilience should not be confused with immunity. Markets can fall sharply when expectations change and a strong run of returns does not guarantee that the next period will be as rewarding. But it is a useful reminder, that the economic headlines and investment returns do not always move in lockstep.
And then there is AI…
Artificial intelligence continues to be one of the biggest forces shaping global markets. The scale of investment is extraordinary, with vast sums being committed to data centres, computer chips and the infrastructure needed to power the next generation of AI tools.
Naturally, this raises questions about whether expectations have become too optimistic. Some technology companies command demanding valuations and there is a risk that the money being poured into AI will, ultimately, generate lower returns than investors currently anticipate.
There is, however, an important distinction between today’s AI boom and some previous technology bubbles: many of the leading companies involved are already generating enormous revenues and profits.
Nvidia provides a striking example. In its latest reported quarter, revenue reached $96.2 billion, more than double the figure a year earlier, while revenue from its data-centre business rose by 117%. Those are remarkable numbers, reflecting very real demand for the computing power needed to develop and run AI systems.
That does not mean AI-related shares cannot become overvalued — they certainly can. Nor does strong revenue growth automatically make a company’s shares a good investment at any price. The crucial question is whether the enormous investment being made today will ultimately generate enough earnings and cash flow to justify the valuations investors are paying.
For now, the spending is being supported by substantial demand but, as the investment cycle develops, the markets will increasingly want to see evidence that the promised productivity gains and commercial benefits are materialising. For investors, that means looking beyond the excitement surrounding the technology and paying close attention to valuations, profitability and the sustainability of future growth.
What does this mean for investors?
There is a common thread running through all of these developments: the cost of money, and the expectations built around it.
Bond investors are demanding compensation for lending to Governments; businesses must weigh the cost of capital when deciding whether to invest and households are dealing with borrowing costs and pressure on their budgets. Meanwhile, equity investors are trying to judge how much future growth is already reflected in share prices.
It is a complicated picture and there are plenty of reasons to feel uncertain BUT uncertainty is not new to investing and markets have always had to navigate a mixture of economic, political and business challenges.
The important question is not whether uncertainty exists — it always will. It is whether the businesses and assets we invest in can continue to generate attractive returns over the long-term and whether the prices we pay offer a reasonable prospect of achieving them.
That is why we believe investment decisions should be based on more than the latest headline or economic forecast. A strong company can still be a poor investment if its shares are too expensive, just as a difficult economic environment can create opportunities where expectations have become too pessimistic.
Ultimately, the cost of money matters because it influences what businesses can earn, what investors are prepared to pay and what returns we might reasonably expect in the years ahead.
How we are positioned
We do not believe the current environment calls for a wholesale defensive shift in long-term portfolios. Instead, we continue to favour diversified portfolios that can participate in economic growth while retaining the resilience to navigate periods of uncertainty.
One important difference compared with recent years is that Bonds are, once again, offering meaningful levels of income. Higher yields have improved prospective returns across parts of the fixed-income market, giving investors another potential source of income and return, alongside equities. Bonds are not without risk of course: their prices can fall when interest rates or inflation expectations rise and credit quality remains important.
At the same time, opportunities continue to emerge across global equity markets. We believe there is value in looking beyond the most fashionable names and headline-grabbing sectors, with active managers potentially able to identify businesses with strong earnings, robust balance sheets and attractive valuations.
None of this removes investment risk and no single asset class will lead markets all the time. That is precisely why diversification remains so important. Spreading investments across regions, sectors and asset classes helps reduce reliance on any one outcome and provides a more balanced foundation for long-term investing.
Staying focused on what matters
When uncertainty rises, it is often investor behaviour, rather than a lack of investment opportunities, that poses the greater risk.
When the headlines focus on inflation, Government debt, mortgage costs and geopolitical tensions, the temptation to make short-term investment decisions is understandable. Doing something can feel more reassuring than sitting tight. However, reacting to every twist in the news can mean selling after markets have fallen or missing the recovery that follows.
History offers plenty of examples of markets recovering from periods of considerable uncertainty, although the timing and scale of any recovery can never be guaranteed. The lesson is not to ignore the risk but to avoid letting short-term headlines dictate long-term decisions.
We believe investors should remain focused on three core principles:
Remain invested. If your portfolio is designed around your long-term goals, avoid making knee-jerk decisions in response to short-term market movements. Some of the strongest market gains have occurred during recoveries that were difficult to predict in advance.
Maintain diversification. Different regions, sectors and asset classes take turns leading performance. Spreading risk helps to avoid becoming too dependent on a single market, investment style or economic outcome.
Expect volatility. Market fluctuations are a normal part of investing, not necessarily a sign that something has gone wrong. They can be uncomfortable, but they can also create opportunities for patient investors who remain focused on value and long-term prospects.
Final thoughts
The Autumn Budget may have delivered fewer surprises than expected but the underlying challenges have not disappeared. Inflation, the cost of borrowing and pressure on public finances will continue to influence households, businesses and financial markets.
Higher interest rates have created opportunities as well as challenges, particularly for savers and Bond investors. Meanwhile, global businesses continue to innovate, invest and grow even against a backdrop of considerable uncertainty.
We cannot control the headlines, predict every market turn or know exactly what the next year will bring. What we can do is build portfolios around clear objectives, sensible diversification and a realistic understanding of risk.
The news cycle will move on, as it always does. The principles of successful long-term investing remain much the same: stay disciplined, avoid unnecessary reactions and keep your attention on what really matters — achieving your financial goals over time.
