November 22, 2024
How are investors preparing for the Budget?
 #NewsMarket

How are investors preparing for the Budget? #NewsMarket

CashNews.co

Executives are selling shares, investors are adjusting their bond portfolios and some business owners even accelerating planned liquidations ahead of Labour’s first Budget in 14 years.

People are taking steps to minimise their exposure to what could be the biggest tax-raising Budget in a generation, with chancellor Rachel Reeves set to map out plans to plug a £40bn hole in the public finances — pushing business confidence to an 11-month low.

“It’s an unusual Budget where we know what’s not coming,” said Laura Foll, a portfolio manager at Janus Henderson, referring to Labour’s pledge to avoid reforming employee national insurance, income tax and corporation tax. She added this had fuelled predictions of other changes: “People are filling the void”.

Director share sales

Executives have ramped up sales of shares in UK-listed companies ahead of the Budget with Reeves expected to raise capital gains tax (CGT) on October 30. She is likely to increase the 20 per cent rate charge on the sale of shares by several percentage points, according to former Treasury officials.

Since the July 4 general election, directors of listed companies have sold their shares at an average rate of £46mn a week, more than double the £22mn pace of the previous six months, regulatory filings show.

The total value of disposals since election day has reached about £688mn, according to figures compiled by Investors’ Chronicle, a weekly magazine for private investors.

Bar chart of Average weekly disposals (£mn) showing Executive share sales have soared post-election

Several executives who sold their shares told the Financial Times earlier this month that they took the decision due to fears over the Budget. “My sale was purely down to concerns about the CGT changes,” said one executive at a London-listed group.

Gilts

Big investors in UK government bonds have keenly followed signals on changes to the country’s fiscal rules, with gilt buyers poring over various balance-sheet measures and the arcane discipline of valuing public sector assets.

Reeves confirmed on Thursday that the UK would change its fiscal rule, and people briefed on Budget discussions said the government would move to a broader gauge of its net debt, public sector net financial liabilities.

Concern over the extra potential borrowing has contributed to a sell-off in the UK’s long-term debt, pushing the 10-year gilt yield up to 4.3 per cent from 3.75 per cent in mid-September.

Line chart of Yields (%)  showing Gilts have risen to levels seen in July

Some investors, though, think UK government bonds are now too cheap and are betting on a “relief rally” once fiscal questions are answered. In a note earlier this month, Barclays strategists recommended tactical long positions on the UK’s long-term debt, saying “pessimism over the Budget is too high”.

Meanwhile, retail investors have bought into short-dated gilts that are trading below face value in a move to minimise their tax exposure.

Winterflood Securities, a government-appointed dealer for UK debt, said it had experienced a 25 per cent increase in traded volumes for fixed income this year with short-dated gilts redeemed in January 2025 and January 2026 among the most popular options for investors.

Although an interest payment is taxed as income, movements in price are free from capital gains tax, with the bulk of returns on gilts that trade below face value, and are held until their maturity date, derived from capital uplift.

Aim market

The possible abolition of inheritance tax relief on shares listed on London’s junior stock exchange has weighed on the index since the election.

Shares in the market have fallen 10 per cent since former prime minister Rishi Sunak called the election on May 22. A sharp decline this month reflects a sell-off spurred by the looming Budget, according to wealth managers. Aim’s performance since election day compared with a 0.5 per cent uplift in the domestically focused FTSE 250 index.

Some fund managers fear that removing the tax break would have a devastating effect on Aim and mark the death knell for the market. However, the London Stock Exchange has maintained it would be “painful” but not fatal.

Line chart of Index points rebased (% change) showing Aim shares have deteriorated

Roughly 10 per cent of capital invested in Aim companies is held in funds specifically marketed towards customers seeking to reduce their tax bill, according to Marcus Stuttard, head of Aim at the LSE. The junior market’s total capitalisation is close to £64bn.

Jess Franks, at Octopus Investments, said that Aim should be viewed as “one of the big success stories” of the past two decades. “It has encouraged suitable investors to take more risk with some of their capital,” she said.

Voluntary liquidations

Some business owners have started to wind up their companies, with the number of voluntary liquidations so far this month soaring past 1,600, according to legal filings. This is more than double the 750 voluntary liquidations during October last year, but still represents a small fraction of the 5.6mn businesses in the UK.

The spike in activity comes as Reeves considers scrapping entrepreneurs’ relief on a sale or liquidation — which enables business owners to pay 10 per cent rather than the more conventional 20 per cent for higher rate taxpayers.

Column chart of Number of filed liquidations showing Voluntary liquidations have surged this year

Evelyn Partners, a wealth management group, said this month that nearly a third of the 500 business owners it recently surveyed who had fast-tracked their exit plans over the past year had done so because of concerns about a possible rise in CGT.

Retail investors

Many small individual investors are realising capital gains at the current 20 per cent rate on their holdings in a general account.

Hargreaves Lansdown, the UK’s largest investment platform, said on Tuesday that clients had been selling investments in September and noted that this was partially driven by potential tax increases. It reported client cash balances rose to £12.7bn in the second quarter, up from £12.3bn in the previous quarter.

Some people are buying shares back in tax-efficient individual savings accounts in a move that helps shelter cash from capital gains and dividends tax. The company said the number of people requesting a transfer had increased by 44 per cent so far this year.

This move is, however, limited in scope by individuals’ £20,000 annual personal tax free allowance.

Additional reporting by Ian Smith and Emma Dunkley

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