Britain’s new government is poised to unveil a budget on October 30 that aims to bolster investor confidence, with global asset manager PIMCO indicating a tighter fiscal outlook than market speculations suggest.
Led by Prime Minister Keir Starmer, the Labour government, which returned to power in July, faces scrutiny over potential borrowing increases.
However, PIMCO believes the government’s initial tax-and-spending plans will not significantly disrupt financial markets.
Will UK’s new budget alleviate investor worries?
PIMCO’s Senior Vice President, Peder Beck-Friis, assured that despite concerns about increased borrowing, the government is likely to uphold fiscal restraint, contributing to a gradual reduction in the UK deficit over the coming years.
He noted that financial markets may be pricing in a higher terminal interest rate than necessary, with the outlook for inflation and growth appearing more subdued than currently anticipated.
As inflation is expected to ease further, there may be opportunities for the Bank of England to lower interest rates, following trends set by countries like the US, Canada, and New Zealand.
UK government bonds May offer value
British government bonds, or gilts, have recently faced underperformance due to inflation concerns and speculation regarding heightened government borrowing.
Following weaker-than-expected inflation data, gilts saw a notable price surge.
Beck-Friis emphasized that gilts remain attractive not only for their yield but also for potential long-term capital appreciation.
The outlook for gilts is positive, especially as the market adjusts to the prospect of additional Bank of England rate cuts once inflation begins to decline.
Some investors prefer gilts over US treasuries
In contrast to rising deficits in the US, the UK is anticipated to adopt a more conservative fiscal strategy.
PIMCO’s Chief Investment Officer for Global Fixed Income, Andrew Balls, remarked that gilts offer better value compared to US treasuries due to expected fiscal restraint.
He also highlighted that gilts represent one of the most appealing global sources for duration, making them an attractive long-term investment.
Labour’s budget likely to emphasize growth
PIMCO forecasts that the UK’s economic growth will remain modest, affected by weak productivity, tighter immigration controls, and increased absenteeism post-pandemic.
Growth is projected to hover around 1% to 1.25% annually, mirroring trends in the eurozone.
Balls identified one area of optimism: the government’s plans to reduce red tape and expedite infrastructure and housing projects.
If successfully executed, these initiatives could enhance productivity and foster economic expansion in the long run.
Beck-Friis expressed optimism that the upcoming budget would not lead markets to question the UK’s fiscal credibility, which was restored following the market chaos triggered by Liz Truss’s tax cuts two years ago.
As inflation continues to decline, gilt yields are expected to become more appealing, offering both yield and potential capital gains.
This could lay a solid foundation for the UK’s economic recovery, with bondholders likely to benefit from holding gilts in the coming years.
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