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This week: a market and mortgage rate focused view on the UK Budget and an update on what to worry about if you are not worrying about AI.
I wrote three weeks ago that the economic outlook for the UK did not look great when compared to the US or Eurozone. The US are due to cut taxes in 2026 and Germany is going to increase spending. Both these should help growth. In contrast, at one point the UK was expected to raise taxes (and slow growth) by up to 1.0%-1.5% of GDP. I knew which market I preferred! However, what surprised me on Wednesday is just how back-ended the UK tax rises are:
There is, in effect, almost no impact in the next couple of years. And those back ended tax rises did help UK gilt yields nudge lower. As an example, here is the 2-year gilt yield for the year to date which will be of relevance to people with 2 year fixed rate mortgages. This won’t be the rate your bank will actually offer, but the direction of travel should hopefully be similar.
So, relative to the (very low) expectations out there, this Budget was almost a success? It looks to be growth neutral for the next couple of years and the move lower in gilts should help government finances and UK borrowers. And a cynic might say that the government will end up cutting the tax rises penciled in for 2028 and after as a pre-election bribe, in which this would all turn out to be a big nothing burger. We shall see. The negative, however, is that this Budget does nothing to boost growth. And the changes to the capital allowance deductions will probably act as a brake on investment. The government looks to have a spending problem. If this is indeed the case, tax rises are not the solution.
The three horsemen of the market apocalypse might be: an AI bust, a government debt revolt and/or problems in private credit markets. I have written plenty about AI in the last few weeks (e.g. here). Government debt costs are, for now, stable and, in the UK at least, slowly falling. That leaves private credit. My AI (Gemini) tells me that global private capital markets, encompassing private equity, venture capital, private debt, real estate, and infrastructure, grew from approximately $9.7 trillion in 2012 to an estimated $24.4 trillion by the end of 2023. A lot of this investment went in with plenty of debt attached and you won’t need me to tell you borrowing costs are up a lot since 2012. There will be a reckoning and given private markets at this scale are a new feature of the economy I think it will look and feel different than credit crunches that have preceded it. There have been a steady trickle of defaults - or cockroaches as the boss of JPMorgan calls them – over the last few months. His point that once you see one cockroach there are normally more to follow.
That said, while I have a fair amount of skepticism about private credit markets overall, they will I think ultimately go as the economy goes. If the economy is in decent shape then I think problems should remain manageable. And that looks to be the case today. Bonds issued by riskier (sub-investment grade) borrowers used to be called junk. But that clearly isn’t good for business so they are now labelled high yield (and I see Standard & Poor’s in the chart below has taken to calling them speculative grade). Either way, default rates to riskier borrowers look to be steady today. And if rate cuts and tax cuts do materialize in 2026 I’d expect them to stay that way for the next 12 months at least.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
