Investors say the pessimism hanging over UK Finance Minister Rachel Reeves’ crucial autumn budget this week masks a number of contrarian opportunities across different sectors and asset classes. Ahead of the chancellor’s critical statement this week – which could herald tax rises, spending cuts or a combination of both – fund managers are preparing high-conviction trades on UK housing, the British currency and beaten-down cyclical stocks. A unique bet on the UK property market John White, founder and chief investment officer of Calibrate Partners, said the UK’s macroeconomic and policy-making context is “as bad as it could be”. He suggested Reeves has “one lever to pull” to stimulate growth: dramatically reducing stamp duty paid on residential property transactions in the UK. White said a potential sharp reduction in UK stamp duty in the 26 November budget, which could be offset by an increase in council tax, could revive the property market and deliver significant benefits to Howden Joinery Group. White outlined the long position in Howden at the Sohn London investment conference in London last week. He said the FTSE 100-listed carpentry and kitchen supplier group is an “exceptionally well-run” business that would benefit from a rebound in the property market. It highlighted its position as the country’s leading kitchen manufacturer, its expansion into broader joinery categories such as cabinets, and its roughly one-third market share. “It fits tremendously into our vertical vision of an accelerating real estate market, which is really the key driver of this,” White told attendees. HWDN-GB YTD Mountain Howden Joinery Group. The UK property market is “on its knees”, with transactions scarce and house construction “virtually non-existent”, and stamp duty the biggest brake on activity, White said. “The effect on the property market is significant, it stimulates employment and aggregate demand; the multiplier effect is between 3.5x and 4,” White said of the impact of a stamp duty cut on the market. White also expects falling inflation in the UK to pave the way for Bank of England rate cuts in the next six months, further supporting property transactions and demand for Howden’s products. Long/short hedge fund Calibrate has set a £13 ($17.04) price target for Howden Joinery, implying a 60% upside on a one-year outlook, which White says is backed by an aligned management team and earnings estimates it believes are too low. Short currencies amid fiscal uncertainty Meanwhile, Mark Dowding, chief investment officer at RBC BlueBay Asset Management, is betting that if UK growth continues to struggle, sterling will weaken. As a result, the fund manager is shorting the UK currency. BlueBay approaches markets through a fixed-income and currency lens, Dowding explained, adding that any tilt toward higher tax hikes could reduce growth, which could be a factor driving down bond yields. He pointed to the current uncertainty over the chancellor’s plans and questioned her credibility in convincing investors that she is controlling public spending. “There is an underlying feeling that if you try to address the UK’s fiscal problems simply by increasing government spending and increasing taxes, you are damaging the growth prospects of the UK economy,” Dowding told CNBC in an interview. This “potentially precarious situation” for UK government bonds is causing BlueBay to “stay out” of government bonds, Dowding added. “For us, the clearest trade has been and remains, for the moment, being short the pound,” he explained. “There is a feeling that, in times of some difficulty, letting the pound go down a little might help soften the blow elsewhere. It might be attractive – and politically expedient – to actually, if not encourage but certainly tolerate, the idea of a weaker currency.” GBP= Mountain pound sterling to date. Medium-term tailwinds boost UK cyclical stocks. More broadly, the prevailing pessimism surrounding the UK economy offers one of the most interesting contrarian setups in developed markets, according to the Man Group, specifically in “unloved” UK cyclical stocks. James Houlden, UK portfolio manager at the London-listed private markets and hedge fund giant, said the “cyclical weakness” in UK stocks is behind us as banks have downgraded their ratings and increased defensive measures. In a recent market commentary, he noted how construction materials, contracting and industrial packaging companies now trade at valuations “rarely seen” in their histories, with many shares below tangible book value. Houlden suggested Labour’s planning reforms are starting to boost housing construction and related industries, supply-side improvements that could prove “far more significant” than marginal tax adjustments. “These are medium-term tailwinds that are being drowned out by near-term noise,” he wrote, highlighting the pessimism surrounding Wednesday’s critical budget. Domestic cyclicals will also benefit from falling interest rates in the UK, driven by falling freight costs, easing energy prices and the strength of sterling against the dollar, Houlden said. It also noted “multiple private equity bidding wars” for UK assets, while listed companies “aggressively” buy back shares. “When management and private equity teams act decisively, perhaps public market investors should take note,” he added. .FTSE YTD mountain FTSE 100 Man Group said the FTSE 100’s advance this year goes against generally “miserable” earnings expectations, with about two-thirds of returns driven by five large-cap banks and a “Momentum 7” including Rolls-Royce, BAE Systems and AstraZeneca. “It’s an exceptionally narrow rally and therein lies the opportunity,” Houlden added. Reeves’ budget comes as the ruling Labor Party struggles to find the best way to tackle the UK’s fiscal black hole, which by various estimates puts it between £20bn and £30bn, and potentially as large as £50bn. In the absence of income tax rises, a so-called “smorgasbord” of smaller tax measures with limited net spending cuts would raise around £25bn, according to John Stopford, head of multi-asset revenue at asset manager Ninety One, who said the chancellor has finally moved away from a market-friendly budget. “On the positive side, this will leave a little more estimated headroom under the Chancellor’s rules, but leaves big doubts about the government’s ability to make difficult decisions and put public finances on a sustainable footing,” Stopford told CNBC in an email.
Three ways for investors to negotiate the UK autumn budget
