The UK’s Autumn Budget delivered historic tax rises yet equity markets responded with relief rather than alarm. For investors, the more important question is not what the chancellor announced, but what the budget reveals about where UK equities sit in a changing global landscape.

Why did markets rally on a day of tax increases?

The market response was driven by what did not happen. Banks, which had been bracing for additional levies, emerged unscathed. Lloyds Banking Group and Barclays both closed up more than 3%. The UK top 100 and top 250 each rose around 1%. According to Gervais Williams, head of equities at Premier Miton Investors, there was ‘quite a bit of relief rally’ as sectors avoided feared penalties. Markets moved to price a 92% probability of a Bank of England rate cut in December, up from 89% before the announcement.

What are the genuine concerns beneath the surface?

The budget’s fiscal arithmetic relies on back-loaded consolidation, with most tightening scheduled for 2027 onwards. This raises credibility questions. Kallum Pickering, chief economist at Peel Hunt, observed that the market is being asked to believe the Office for Budget Responsibility’s (OBR’s) forecasts, which are ‘chronically optimistic’. The fiscal headroom increased to £21.7bn from £9.9bn, but the OBR’s downgrade to productivity assumptions could add £15–20bn to debt if growth disappoints. Williams sees a longer-term structural issue; he states, ‘as a nation we’ve long been living beyond our means.’ Government deficits have exceeded national savings for years, creating dependence on overseas buyers of UK debt. In a world shifting towards nationalism and ‘me first, you second’ politics, that dependence becomes a vulnerability.

Which sectors face the greatest pressure?

Consumer-facing businesses with large workforces are most exposed. The national insurance contributions increase on pension salary sacrifice, combined with minimum wage rises, creates a compounding cost burden for employers. Williams is ‘generally cautious, not just on hospitality, not just on retail, security, [but] all these areas which have large numbers of staff’. The challenge is straightforward: these businesses will struggle to raise prices when competitors are cutting them to retain customers.

Why might UK equities still outperform?

The investment case for UK equities rests not on the domestic economy but on the structural composition of the market. The UK top 100 is dominated by companies generating surplus cash, with approximately 80% of earnings derived from operations outside the UK. Williams argues this positions UK equities to benefit regardless of domestic conditions. Even a sterling crisis that imports inflation would, perversely, boost the value of overseas earnings when translated back into pounds.

The outperformance has already begun. In sterling terms, the UK top 100 has returned 22% year-to-date, compared with 11% for the S&P 500. This has occurred despite persistent domestic selling; October was one of the worst months for UK fund outflows in three years. International buying and corporate buybacks have more than offset domestic redemptions. Williams poses the obvious question: ‘What happens if local sellers stop selling so much?’
The historical parallel is instructive. In the 1960s and 1970s, UK equities massively outperformed the S&P 500, despite sterling crises and an International Monetary Fund bailout in 1976. The conditions were similar: inflation, wage pressure and economic instability. Companies generating surplus cash could acquire distressed competitors cheaply and grow earnings through consolidation. Williams expects this pattern to repeat, noting that HSBC’s acquisition of Silicon Valley Bank UK for £1 in 2023 added billions to its market value.

What characteristics should investors prioritise?

Companies generating surplus cash with strong balance sheets are best positioned to navigate margin pressure. Williams emphasises two additional factors: customer service and staff motivation. In an environment where competitors cut prices to retain business, companies that justify premium pricing through service quality will protect margins. The ability to pay and grow dividends becomes critical not merely as a return metric but as a signal of financial health and a foundation for raising capital to pursue acquisitions.

For smaller companies, the opportunity is proportionately larger. A billion-pound company acquiring a distressed competitor for a nominal sum can achieve earnings upgrades that transform its valuation. Williams expects the small-cap effect, absent for a decade as index funds favoured larger companies, to return in force.

What are the key risks?

The thesis presented by Gervais Williams depends on the UK avoiding a fiscal crisis severe enough to impair even cash-generative companies. A recession pushing unemployment sharply higher would compress tax receipts and test the budget’s back-loaded consolidation. Williams’s working assumption that global profit margins may halve over the next decade would pressure all companies. However, though those with surplus cash would survive, while weaker competitors fail. The timing of any downturn remains unknowable.

Edison’s insight

The UK budget changes little about the fundamental investment case for UK equities. The market’s structure, dominated by cash-generative businesses with international earnings, positions it to benefit from the shift away from globalisation regardless of domestic economic conditions. The emphasis should be on company fundamentals: surplus cash generation, dividend growth capacity and the ability to acquire distressed competitors when opportunities arise. If you would like to learn more about Gervais Williams’ budget breakdown, check out our webinar.