Market Update 1st September 2025

That’s the answer… but what was the question again? 

Mid to high single digit percentage gains over June, July and August in the UK, US and wider international benchmarks made that a successful summer for most investors. Unfortunately, a further deterioration in public finances means the government is once again scrabbling around trying to find ways to balance the books ahead of the next budget.

According to reports at the back end of last week, the chancellor is planning another levy on the UK’s banks this autumn. This is not a surprise. It doesn’t seem to matter what the fiscal problem is, or what caused it – taxing the banks has been the apparent answer for some time.

Politically, we can see why this makes sense. Public opinion of the sector has it somewhere between a pantomime villain and the antichrist, and with profits swelling considerably in recent years, the government has the motive, as well as the means and opportunity.

I am not here to defend the banks, but I will highlight why the government shouldn’t just view financial services as a piñata to smash every now and again. First of all, banks’ heightened profitability isn’t going to last forever. Just as profits from oil and gas flow up and down, banks are inherently cyclical. The goldilocks situation of high rates and stable or growing economies has only recently replaced the woes of the ultra-low rate years. Relying on a volatile sector is not the best way to balance the books long-term.

You also risk poking the bear. HSBC has previously threatened to up sticks and head east. It is, after all, the Hong Kong and Shanghai Banking Corporation. Should it do that, it would be a terrible blow to UK PLC, and also to the exchequer’s take. Not only does HSBC pay corporation tax and an existing bank levy, it has tens of of UK-based staff, many of whom are in London given that is the current HQ. Another reason why the banking space might not be the most reliable boyfriend.

Where the money should come from is of course a different question. And one I’m not going to get dragged into answering.

Instead, let’s take a look at the cause of the government’s problem in the first place. debt is expected to be 95.9% of national income, a level twice that utilised over most of the pre-crisis years. As a result, the cost of servicing the debt is now over £100bn a year. That’s not too dissimilar to the size of the deficit, the existence of which means all else being equal, the interest bill will only keep increasing. For context,

Unlike some other outgoings, cutting the interest burden spend is not optional. The only ways of reducing it as a percentage of GDP are to grow the economy at a faster rate, reduce the deficit by reducing spending or increasing taxes, or benefit from lower interest rates. That is by far the simplest solution. The problem is, the main lever you can pull to influence rates is not located in number 10. The Bank of England independently sets the base rate.

Which brings us nicely round to Donald Trump. The situation in America is very similar. The president is constantly ramping up the pressure on the Fed to cut rates, and using far more derogatory language than the jibes Mark Carney (the original unreliable boyfriend and now Prime Minister of Canada) ever had to endure during his time on Threadneedle street. The US debt to GDP ratio is even worse, as is the spend on debt servicing as a percentage of GDP.

We shall see how his lobbying goes. Indications are that he will get his wish of cuts by the end of the year. That is of course, good news for markets. Low rates encourage consumer spending, make expansion projects more viable from a financing perspective, and have the effect of reducing the discount rate applied to most analysts’ models. That’s helpful for valuation arguments. While the odds certainly imply a more dovish stance is forthcoming, the pace and depth of cuts remains open for debate.

With that in mind, our focus remains squarely on valuation, and getting to grips with the quality and resilience of the investments we monitor. In other words, we seek to employ some good old fashioned level-headed thinking. Wouldn’t it be nice if we got a bit more of that at the top of politics too…

George Salmon – Senior Research Analyst

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