Shares fall as Budget squeezes big investors

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The Independent Online
SHARE prices lost all of their early gains and were forecast to fall further this morning following a Budget that was seen as hitting the pockets of big investors and threatening a continued squeeze on consumers in future years.

But analysts said government bond prices should rally after initial falls yesterday in the wake of a Treasury forecast that public sector borrowing would reach a higher-than-expected pounds 50bn in the 1993/4 financial year. Sterling too was seen as a beneficiary of the Budget.

The FT-SE 100 share index, which was showing a slight rise before the Chancellor began to speak, closed 3.1 down at 2,919.3 after touching 2908.3.

Paul Walton, market strategist at James Capel, said the Budget was 'bond-friendly and equity-unfriendly'.

This was not surprising considering the Chancellor had a mountain of gilts to sell and meant the stock market would fall this morning.

Mr Walton said the changes planned in the taxation of dividends through the reduction in advance corporation tax from 25 to 20 per cent would have the biggest impact on share prices.

'Pension funds, which do not pay tax, own about 45 per cent of the UK equity market. They can expect to lose pounds 600m or 5 per cent of their pounds 3bn a year income from tax credits, so the stock market is worth 5 per cent less, making bond markets more attractive to pension funds.'

Food retailers, brewers and healthcare companies, which pay out a low proportion of earnings, could use the cash-flow advantages of the new tax regime to increase dividend payments.

David Manning of Legal & General, the insurance company, said: 'The equity market will open lower tommorrow. The shock was on ACT. It will reduce the yield on the All-Share index for some of our funds.'

Jerry Evans of NatWest Securities said that the Budget contained many plusses and minuses for the stock market. Companies like Hanson and BAT Industries could see an extra 3.5 per cent to 4 per cent added to their earnings after the changes to dividend tax rules.

Prices of government bonds fell sharply in reaction to the Treasury forecast of a pounds 50bn public sector borrowing requirement for the 1993/4 financial year. Market forecasts had been in a range of pounds 40bn to pounds 50bn.

At the long end of the cash market, Treasury 8.75 per cent 2017 fell by 25 32 to 10317 32 after trading at 1045 16 before the Chancellor began his speech.

Simon Briscoe of Midland Montagu said the bond market had been hit by a 'double whammy'.

'The absence of fiscal tightening in 1993/4, against expectations of a pounds 4bn- pounds 5bn net revenue increase, has pushed the PSBR well above market forecasts.

'At the same time the change in the full-funding rule to allow purchases by banks and building societies to count as funding and take pressure off other investors is the absolute minimum that the Chancellor could have done.'

Ruth Lea of Mitsubishi Bank said that a projected PSBR equivalent to 6 per cent of gross domestic product in 1996/7, despite planned revenue-raising of pounds 6.5bn in 1994/5 and pounds 10.5bn in 1995/6, was a 'horrible' figure.

Sterling remained on a firm note throughout the Budget speech. It closed one-and-a-half pfennigs up in London at DM2.3985 and 1.20 cents higher at dollars 1.4450 while its trade-weighted index ended 0.5 up at 77.7.

Mark Brett of BZW said currency dealers now believed the UK was now getting close to the bottom of the interest rate cycle.

'Interest rate futures prices have fallen back to discount a 0.5 per cent cut in base rates to 5.5 per cent by the summer but no further change after that until well into 1994. This should help the pound remain firm against the mark and it could reach DM2.50 by the end of this year.'

David Cocker of Chemical Bank said the Budget was 'slightly positive' for sterling.

'Mr Lamont's measures were more neutral than foreign currency markets had been anticipating. They will like the commitment to a sustained economic recovery.'

'On the other hand, a pounds 50bn PSBR in 1993/4 is just as worrying to the currency markets as the domestic gilt market. It's still a hell of a lot to get away.'

Ian Buckley of Henderson Administration, which manages pounds 11bn of pension funds, unit and investment trusts, said: 'There is no reason to buy gilts, despite the damage to our dividend income from the proposed tax changes.'

He thought the change to the full-funding rule would not have a big effect, but the rise in the value of sterling would make gilts more attractive to overseas investors.

Clive Anderson, transport analyst at Smith New Court, said the transport industry would not be unduly concerned by the increased duties on petrol and diesel.

(Photograph omitted)