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Steve Ruffley

How will the FTSE react to the Summer Budget?

After the ‘shock’ election result – less a shock that the Tories won, more that they got a surprise majority – the markets have responded very favourably. And of course the UK’s main stock index the FTSE 100 has rallied. So why is this?

  1. No mansion tax as proposed by Labour
  2. Cuts to the welfare state
  3. More of the same: we had small growth, but it was growth!
  4. No one liked or trusted Ed Miliband

Trust is a powerful thing when you refer to the markets. Fear and greed drive investing activity: you only have to look at the Chinese markets to see the fear element driving stocks lower. So why did the UK voters trust David Cameron? Why did investors lose their fear and buy the FTSE constituents, implying a belief that Cameron could steer the UK to success?
The Summer Budget is the answer. This is the result of the election. Promises were made, mandates were set out and, if you voted for more of the same, this is what you hoped to get. The Budget George Osborne has just released has once again proved a hit with investors. And why?

  1. Inheritance tax threshold raised
  2. Welfare state slashed (£12bn+)
  3. Higher minimum wage
  4. Non-domicile clampdown
  5. £10bn for the NHS

The FTSE is relatively high currently and a lot of this can be attributed to the policies instituted by the Tories as they steadied the ship, created jobs and, to many observers, seemed to talk the most sense about the future. Some of the current bid in the FTSE can also be attributed to the Greek government finally admitting it is powerless to refuse the conditions of another bailout.

So what’s next for the FTSE?

The Budget will systematically cut benefits and public sector pay and continue to make young people pay in advance for their own future. I suspect that the Budget pledges are pretty much priced into the FTSE right now. We have been on a US-fuelled QE free money rush, where people take low-interest borrowing rates and put loans into stocks for a greater return.
My main concern is that people now take a ‘risky’ investment like the FTSE and treat it as if it were guaranteed money. It is far from that. Take my example of China: £3.4 trillion was wiped off the value of Chinese shares in the space of just three weeks (14 years of Greek GDP) – this is how fast and how far markets can move on fear.
We know that the US will put rates up. It’s guaranteed. If it’s Q3 or Q4 of this year, or Q1 2016, who can say, but when they do go up it will be for the next decade. The UK has generally followed the US so how long will it be before the UK put its own rates up? How long before that 0.5% ‘free money’ is taken out of the market and put back into cash?
This is my concern for the FTSE. Since we topped 7000 the FTSE has looked increasingly weak. I would say by mid-2016 we could be trading as low as 5800/700. Once interest rates rise the Budget boom may be soon forgotten.
Steve Ruffley
Chief Market Strategist
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The content of this article is the personal opinion of the author and not The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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