Three ways for investors to trade the UK Autumn budget
Investors say the pessimism looming over U.K. Finance Minister Rachel Reeves’ crucial Autumn Budget this week masks a range of contrarian opportunities across different sectors and asset classes. Ahead of the chancellor’s critical statement this week — which could herald tax rises, spending cuts, or a combination of the two — fund managers are lining up high-conviction trades on U.K. housing, the British currency and beaten-down cyclical equities. A single stock bet on the U.K. housing market John White, founder and chief investment officer of Calibrate Partners, said the U.K.’s macroeconomic and policymaking backdrop is “about as bad as it could be.” He suggested that Reeves has “one lever to pull” to stimulate growth: dramatically cutting the stamp tax paid on U.K. residential property transactions. White said a potential sharp reduction in U.K. stamp duty in the Nov. 26 budget, which could be offset by an increase in council tax, could reignite the housing market and unlock significant upside for Howden Joinery Group . White outlined the long position in Howden at the Sohn London investment conference in London last week. He said the FTSE 100-listed kitchen supplier and joinery group is an “exceptionally well-run” business which would benefit from a housing market rebound. He highlighted its position as the country’s leading kitchen manufacturer, its expansion into broader joinery categories such as wardrobes, and its roughly one-third market share. “It fits massively into our top-down view of an accelerating housing market, which is really the key driver of this,” White told attendees. HWDN-GB YTD mountain Howden Joinery Group. The U.K.’s housing market is “on its knees,” with muted transactions and housing starts “virtually non-existent” — and stamp duty is the biggest brake on activity, White said. “The effect in the housing market is important, it stimulates jobs and aggregate demand; the multiplier effect is somewhere between 3.5x and 4,” White said of a stamp tax cut’s impact on the market. White also expects falling U.K. inflation to pave the way for Bank of England rate cuts within the next six months, further supporting housing transactions and demand for Howden’s products. Long/short hedge fund Calibrate has set a £13 ($17.04) price target on Howden Joinery — implying a 60% upside on a one-year view — which White said is supported by an aligned management team and earnings estimates he believes are too low. A currency short amid fiscal uncertainty Meanwhile, Mark Dowding, chief investment officer at RBC BlueBay Asset Management, is wagering that if U.K. growth continues to struggle, sterling will weaken. As a result, the fund manager is shorting the U.K. currency. BlueBay approaches markets through fixed income and FX lenses, Dowding explained, adding that any tilt towards greater tax hikes could squeeze growth, which could be a factor that drives gilt yields down. He pointed to the ongoing uncertainty over the chancellor’s plans, and questioned her credibility in convincing gilt investors that she is getting a grip on public spending. “There’s an underlying sense that if you try and address the U.K.’s fiscal problems just by ever-higher government spending, ever-higher taxation, you’re damaging the growth outlook for the U.K. economy,” Dowding told CNBC in an interview. This “potentially precarious situation” in U.K. government bonds is causing BlueBay to “sit on the sidelines” on gilts, Dowding added. “For us, the clearer trade has been and continues to be, for the time being, to be short in the pound,” he explained. “There’s a sense that, in a time of some difficulty, letting the pound go a bit lower might help soften the blow elsewhere. It might become attractive — and politically expedient — to actually, if not encourage but certainly tolerate, the idea of a weaker currency.” GBP= YTD mountain Pound sterling. Medium-term tailwinds boost U.K. cyclical stocks More broadly, the prevailing gloom surrounding the U.K. economy offers one of the more interesting contrarian setups in developed markets, according to Man Group — namely in “unloved” U.K. cyclical stocks. James Houlden, a U.K. portfolio manager at the London-listed hedge fund and private markets giant, said U.K. equities’ “cyclical underbelly” has been left behind as banks have re-rated and defensives have surged. In a recent market commentary, he noted how construction materials, recruitment, and industrial packaging companies now trade at valuations “rarely seen” in their histories — with many stocks below tangible book value. Houlden suggested that Labour’s planning reforms are starting to boost housebuilding and related industries — supply-side improvements that could prove “far more significant” than marginal tax adjustments. “These are medium-term tailwinds being drowned out by near-term noise,” he wrote, highlighting the pessimism surrounding Wednesday’s critical budget. Domestic cyclicals are also set to benefit from falling interest rates in the U.K., driven by falling freight costs, easing energy prices, and sterling’s strength against the dollar, Houlden said. He also pointed to “multiple private equity bidding wars” for U.K. assets, while listed companies “aggressively” buy back stock. “When private equity and management teams act decisively, maybe public market investors should take note,” he added. .FTSE YTD mountain FTSE 100 Man Group said the FTSE 100’s advance this year runs counter to generally “miserable” earnings expectations, with roughly two-thirds of returns driven by five large-cap banks and a “Momentum 7” that includes Rolls-Royce , BAE Systems and AstraZeneca . “It’s an exceptionally narrow rally and therein lies the opportunity,” Houlden added. Reeves’ budget comes as the ruling Labour party grapples with how best to tackle the U.K.’s fiscal black hole, which varying estimates putting it at between £20 billion and £30 billion, and potentially as large as £50 billion. In the absence of income tax rises, a so-called “smorgasbord” of smaller tax measures with limited net spending cuts would raise about £25 billion, according to John Stopford, head of multi-asset income at asset manager Ninety One, who said that the chancellor has ultimately backed away from a market-friendly budget. “On the positive side, this will leave a bit more estimated headroom under the Chancellor’s rules, but leaves major doubts about the government’s ability to take difficult decisions and put the public’s finances on a sustainable footing,” Stopford told CNBC in an email.
<
