UK: Equities to benefit amid a successful immunisation programme – HSBC

UK Chancellor Sunak has announced an increase in corporation tax to 25% in 2023 from 19% currently, but has also extended important income support measures. Overall, following the policies announced in the Budget economists at HSBC maintain that the UK is well placed to generate a strong economic recovery from Q2 2021 and believe an overweight view on UK equities remains justified, although are cognisant of potentially subdued returns.

Key quotes

“UK Chancellor Rishi Sunak announced that levels of taxation would rise in the coming years in order to close a gap in the public finances created by the Covid-19 pandemic. In particular, the rate of corporation tax will rise to 25% in 2023 from 19% currently, and income tax thresholds will be frozen from 2022 until 2026. Importantly, however, income support measures remain in place. The UK Job Retention Scheme has been extended until September, protecting household finances as pandemic-related restrictions remain in place.”

“We expect the successful vaccine rollout to lead to a gradual and durable lifting of restrictions, releasing pent-up demand as households run down savings accumulated over the past year. In this context, we think it makes sense to remain overweight UK equities, which are exposed to cyclical sectors that typically benefit from periods of strong economic growth.”

“We should be aware that potential returns could be limited by the strong rally witnessed in recent months and concern over possible bad news on covid mutations in the future. There is also the risk that the Treasury announces more significant tax rises next year, or policy support is withdrawn too early.”

“We continue to see UK gilts as overvalued and prefer to be underweight in this asset class, along with other European government bonds where we are in effect being penalised relative to holding cash. Positively, however, dovish global central banks limit the scope for volatility or a sharp jump in yields.”