What does Javid's resignation mean for UK markets and investors?

What does Javid's resignation mean for UK markets and investors?

The sudden resignation of Chancellor of the Exchequer Sajid Javid is expected to mean looser fiscal policy, which will be good news for UK assets, but experts have warned the move increases short-term uncertainty.

In a shock to the market and the UK public, the Chancellor announced his resignation today (13 February), just under a month before he was expected to deliver the first post-Brexit Budget. Chief secretary to the Treasury, Rishi Sunak, has been confirmed as his replacement.

The markets seem to have taken the news as a positive development, with sterling rising against both the US dollar and the euro on expectations that the new Chancellor will employ looser monetary policy to boost markets.

Rising sterling
Neil Wilson, chief market analyst at Markets.com, said: "The pound seems to like this reshuffle. Gilt yields sprung higher, as the market bets on this meaning more spending, less austerity and more growth. Traders are betting that Johnson and Cummings owning the Treasury and controlling the purse strings means more spending."

Capital Economics said the news could mean an increase to its forecasts for GDP growth, interest rates, gilt yields and the pound, which it added are "already above consensus".

"We already thought that the Budget on 11 March would involve an extra loosening in fiscal policy worth 0.5% of GDP, which coming on top of the extra government spending announced in September 2019 would mean a fiscal boost of 1.0% is in the pipeline. It's now possible that the Budget will provide a bigger bang," said Paul Dales, chief UK economist.

Increased uncertainty
However, cautious voices have also pointed out that the Chancellor's resignation so close to the Budget spells more uncertainty for savers and investors.

Adrian Lowcock, head of personal investing at Willis Owen, said: "The resignation of Sajid Javid today has sent shock waves throughout the financial services industry. He is the first Chancellor in modern history to not deliver a Budget.

"With only 27 days to go now until the Budget, it is unclear whether it will even go ahead with so little time for Javid's replacement, Rishi Sunak, to prepare.

"Sajid Javid had alluded to reforms to pension tax relief, the pension's dashboard, entrepreneurs' relief, RPI and other policy changes. These are all now in doubt adding more uncertainty for savers and investors."

Nimesh Shah, a partner at leading accounting and tax advisory firm Blick Rothenberg, expects a lot of the material for the Budget to have already been prepared in advance. However, he added that "any major changes and decisions that were to be announced would presumably need to be put on hold and assessed by the new Chancellor".

He said: "There has been a lot of speculation around entrepreneurs' relief being changed or restricted in the forthcoming Budget - it's possible that any such changes which were driven by Sajid Javid could now be shelved, and delayed in their introduction until a future Budget.

"More recently, there has been suggestion higher/additional rate relief for pension contributions could be scrapped and a wealth tax on property introduced - surely such significant proposals would almost certainly need to be reconsidered by the new Chancellor."

Rachael Griffin, tax and financial planning expert at Quilter, pointed out that incoming Chancellor Sunak will have to work "extraordinarily quickly to get a grip on the upcoming Budget and present it to Parliament next month".

"It is yet to be seen whether Sunak will serve as No. 10's puppet, given the speculation that the Prime Minister's office is seeking to take closer control of the Treasury," she said.

She added: "He will inherit several political hot potatoes. For instance the government has already promised to fix its disastrous pension annual allowance taper, which has led to staffing shortages in key public services, including the NHS.

"The government is also under pressure to address the issue of social care funding which has been kicked down the road multiple times and was a major Tory manifesto pledge."

This article was first published by Investment Week, International Investment's sister title