The UK received the largest sustained fiscal boost since the financial crisis
On 11 March 2020, the UK Chancellor laid out his Budget and in coordination with the Bank of England’s (BoE) 0.50% emergency rate cut, it has been designed to support the economy against any disruption caused by the COVID19 outbreak. These actions come in parallel with stimuli from governments and central banks around the world aiming to shore up their respective economies.
Chancellor Rishi Sunak has announced a £30bn package as a near-term response to the coronavirus outbreak. This includes not only additional funding to the NHS and extensions to sick pay, but also specific relief for small and medium-sized enterprises (SME’s) through the suspension of business rates and a “temporary coronavirus business interruption loan scheme”. Support for SME’s is also occurring through BoE’s new Term Funding scheme, which creates additional incentives for banks to lend to SME’s during this period.
Chancellor Sunak has also announced medium term investment plans budgeting for additional spending in infrastructure and research and development.
Key watchpoints: Initial market response
The pound fell immediately after the emergency rate cut by the BoE, with GBP/USD dropping to a daily low of 1.2830 but soon recovered to above 1.291. Foreign exchange markets largely seemed to have anticipated the step by the BoE. After the chancellor's budget statement, sterling fell back again suggesting that market participants had possibly expected more fiscal stimulus.
The immediate market reaction has been muted, which suggests that the stimuli had been largely expected.
Within the UK market, the measures should support domestic-oriented companies the most. The fiscal stimulus is the largest since the financial crisis. The UK large-cap equity market is more linked to global factors with its large exposure to multinational non-UK exposed profits and high weighting to energy companies. A sustained recovery in large-cap UK equities will require a rebound in oil prices and stronger global growth.
The long-term fate of the pound still depends more on the Brexit negotiations than monetary policy or the gyrations of the Coronavirus epidemic. If we see good progress on the trade deal between the EU and the UK it could help the pound to strengthen vs. the U.S. dollar from cheap valuations but is far from a foregone conclusion.
We believe the large sell-off in the UK market has potentially created an attractive valuation opportunity. The UK has a more attractive valuation than all major markets, including emerging markets. This view is supported by a range of indicators which suggest that the market has become extremely oversold. Whilst expected, the coordinated stimulus packages of the BoE and UK Treasury place the UK ahead of most other developed countries in terms of its response.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
1 Source: Refinitiv Datastrea, as of 11 March 2020