2025 Budget Commentary

The Budget 2025 – What does it mean for markets?

The chancellor has confirmed a budget that has broadly fallen into the parameters of what was expected. Promises to keep income tax rates unchanged as per the manifesto pledge have been adhered to, and the government was keen to talk up allocations to infrastructure and transport projects. In another anticipated but welcome move, it also moved to encourage investing through Stocks & Shares ISAs.

But given the fairly alarming imbalance between what the government spends and what it receives, there were still c£26bn of changes aimed at balancing the books. Not least another freeze on income tax thresholds, efficiency drives and administrative cuts, and a ‘mansion tax’. There was a reduction in the generosity of salary sacrifice pension contributions too.

To be fair to the chancellor, her position is rather difficult. The problem is that the red briefcase in her hand is overshadowed by the mountain of debt on her back. The UK’s debt is approximately equal to GDP, with an anticipated annual interest cost of over £100bn. That means close to 10% of total tax receipts go on servicing the existing debt. The country is issuing more debt all the time, and the interest costs associated with new debt are now significantly higher.

One would assume the fiscal problems brought about by the debt burden would be bad news for the stock market. But there are two main points here. Firstly, the fiscal predicament is not news to anyone. Secondly, it is simply incorrect to assume contagion from the government’s fiscal woes to the main stock market. Sure, there were direct hits to some businesses, perhaps most notably to bookmakers, but this remains a small sector of the UK market. The news that the banks were spared from further raids is far more significant for investors, and was leaked even earlier than the rest of the budget was.

That’s because financial services remains the most important sector in the UK stock market. The other two in the top three are consumer goods and natural resources. The biggest companies in these three sectors are HSBC, Unilever and Shell. None of them are particularly sensitive to the strength of the UK consumer.

In fact, they are all so detached from the UK that none report in sterling, with US dollars and euros their preferred, and indeed more relevant, currencies. Shell is a properly global business, with the US as its single biggest geography. The same is true of Unilever, with the kicker that it sells over half its products to emerging economies. HSBC is effectively an Asian bank, with just over 70% of its reported profits originating there last year. Unsurprising really, given its name is an abbreviation for the Hong Kong and Shanghai Banking Corporation.

On the subject of names, it wasn’t long ago that Shell was Royal Dutch Shell. Unilever and fellow top 10 UK businesses RELX, GSK and AstraZeneca all get their names from mergers with European and US partners. Mining giant Rio Tinto has next to nothing in the UK, and doesn’t even use the English language for its name. There are misnomers too – BP’s full title of British Petroleum is a massive stretch, and National Grid would perhaps be better named International Grid given over half of its long-term assets are in the US.

You get the picture. Across the 100 largest UK businesses, 77% of revenue is generated outside these shores.

Of course, how the government acts is important for some sectors, and the impact the government has on the bond market has a knock-on effect for equity investors. But over the long-term, it simply is not correct to transpose concerns around public finance to the stock market.
The proof in the pudding is that over the same time period, UK public debt has gone from under 35% to its current level of 95% (January 2008 to September 2025), the MSCI United Kingdom index has delivered a total return of just over 200%. This is not a UK-specific phenomenon either. The same is true in the US – in fact, the returns there are larger despite its debts having spiralled to comfortably over 100% of GDP. Its debt costs are also up.

As I alluded to above, what the chancellor says about the economy impacts the bond market. However, it is not the only, or indeed main input into the price and yield of government debt (which by definition move inversely to each other). For example, what the Bank of England does with the base rate is generally far more important. But given the government is the lender associated with the gilt market, the state of the public purse matters. Just ask Liz Truss. A budget that borrows too much will mean investors will want a higher yield for the extra risk. Of course, the likelihood of a UK default will be incredibly low in most foreseeable scenarios, but it is the direction of travel (or what an economist would call the marginal change) that matters.

The budget has not prompted a big move in prices and yields. That’s because a lot of the moving and shaking in the gilt market was done in advance. Rumours that the aforementioned manifesto promises were going to be broken and income tax receipts were set to swell briefly inflated yields, but confirmation this is not happening mean the returns on many tranches of government debt fell back a touch. Nonetheless, yields remain around multi-year highs.

It is unusual for political or economic events to dominate our thinking or positioning and this budget is no different. Attempting to react to a series of short-term events is unlikely to be profitable. Worse still, it would mean losing focus on the real long-term issues, and the fundamental valuation principles good investing is built on. It is on such matters that we will remain focused.

To end on a bright note, it seems the changes to encourage investment into Stocks & Shares ISAs means the government shares our conviction that sensible investing can bring long-term rewards. Hopefully that is something all parties can agree on.

George Salmon – Senior Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of George Salmon. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments. FPC25990