Could the Budget boost Britain’s unloved stock market?

The Chancellor’s preview of what now looks certain to be a tax-raising Budget had three audiences. First, she wanted to give her backbenchers an overdue Economics 101 in tax and spend. If you refuse to countenance spending cuts, then you will have to accept higher taxes. It’s one or the other.

Second, she had political points to make. Backward-looking, as she continued to highlight the previous government’s record; plus a forward-looking warning about Reform’s still gestating economic policies.

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But the most important audiences were the bond market and the Bank of England. It was no coincidence that Rachel Reeves’s press conference came two days before this week’s rate-setting decision. She wanted to make clear that she will not be repeating last year’s inflationary National Insurance mistake. This year’s tax hikes, if that’s what we get, will be expressly designed to bear down on inflation.

It's not hard to work out why she should want to do this. When you are spending more than £100bn a year simply to service the national debt, every quarter point rate cut, and consequent fall in bond yields, is a fiscal windfall. Persuading the market that she is serious about inflation is the single most powerful measure the Chancellor can take to restore the public finances.

I’m not surprised, therefore, that when I spoke this week to Alexandra Jackson, a UK fund manager at Rathbones, she said that, for the first time in a long while, she can’t wait for Budget Day. She believes, and I think she is right, that the Budget could be the ‘clearing event’ that puts UK equities back on investors’ radar.

• Read: What can we expect in the Autumn Budget?

The bond market has already got the message loud and clear. The yield on the 10-year Gilt has fallen from around 4.8% in the summer to 4.4% today. Fixed income investors have assumed for some time that the Treasury will deliver a dis-inflationary Budget to give the Bank room to cut rates.

Unlike last year’s employer NI hike, which saw higher employment costs simply passed on to consumers, fuelling food inflation in particular, an across the board rise in income tax would take money out of people’s pockets. Obviously, that is a two-edged sword, but it can be seen as a net benefit for investors in the most cyclical, interest-rate sensitive part of the UK market, the FTSE 250. The mid-cap index tends to rise when bond yields fall.

Were the Budget to clear away the fog of uncertainty surrounding the UK’s economy and fiscal and monetary policy, it would not mark a change in direction for the London market but build on what has already been a very positive year. The year-to-date total return for the FTSE All Share index has been the second-best first ten months of a calendar year in 30 years, only just pipped to the post by 2009, when markets were bouncing back from the financial crisis.

The UK market, in line with those in Japan, Europe and emerging markets, has outperformed the US in sterling terms so far in 2025, a signal that something fundamental has shifted as investors have looked to diversify away from a highly-rated, highly-concentrated US market.

• Read: What are the world’s cheapest stock markets?

The appeal of out-of-favour markets like the UK is only likely to increase as late-cycle volatility, such as this week’s US and Asian wobble, reminds investors of the increasingly bubbly nature of the dominant AI narrative. A couple of fun facts from the Rathbone investor day at which I bumped into Alexandra illustrate the frothiness of the US market, in particular.

First, a quarter of all fund launches so far this year have been of single-stock, leveraged ETFs - a sign if ever there was one that investors couldn’t care less about diversification as they chase top of the market returns. Second, half of all companies in the S&P 1500, a broad US index, have negative returns year to date - this is a very concentrated, and so fragile rally.

Global investors looking to mitigate these risks aren’t fussed about domestic political noise. They won’t have even heard of the winter fuel allowance. Rather they see a market with a low valuation, low positioning, low expectations. They see a market that’s cheap, stable and investable. After the Budget, it could look even more so.

So far, the main beneficiary of increased interest in the UK stock market has been the blue-chip FTSE 100. In fact, according to Man Group, two thirds of the benchmark’s returns are down to just 12 stocks - banks plus an eclectic group of momentum plays including Rolls-Royce, BAE Systems and AstraZeneca. This is not surprising. Passive flows inevitably go to the most liquid part of the market. Unlike the Russell 2000, which has performed well since the Fed started cutting rates in September, the FTSE 250 has been left behind.

If you had invested £100 in the FTSE 100 at the start of the year, re-investing your dividends, you would have £122 today. The same amount, invested on the same basis in the FTSE 250, would be worth £110. This has been the story since the pandemic, but it is unusual on a longer timeframe. If you had invested that same £100 in both indices 20 years ago you would have £380 today in the FTSE 100 but £480 in the mid-cap index. Please remember past performance is not a reliable indicator of future returns.

• Read: When might the FTSE 100 hit 10,000?

There has never been a better time to be well-diversified, to reduce your exposure to a frothed-up US technology sector. People got used to TINA (there is no alternative) in the days of US exceptionalism. Perhaps it’s time to welcome TANIA (there are now investment alternatives). There are TANIAs all over the world today - I like both Japan and emerging markets - but I expect the Budget to focus attention closer to home.

This article was originally published in The Telegraph

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