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Outsource of opportunity

The Chancellor’s cuts did not send tremors through the markets and instead there was good news for investors on transport and outsourcing. Gregor Watt reports

Chancellor George Osborne’s austerity measures in last week’s comprehensive spending review, have been received with indifference by investment markets.

With the majority of the measures concentrating on public sector spending and welfare benefits, UK equity markets seemed to barely register the Chancellor’s announcements. On the day of publication of the CSR, the FTSE 100 continued its steady increase over the last month, finishing 0.77 per cent higher on the day.

F&C head of equities Peter Lees says there was nothing in the announcements to either excite or shock markets while the fact that the Government is sticking to its deficit-reduction plan has been welcomed.

Fidelity UK aggressive fund manager Aruna Karunathilake says: “The main objectives of the spending review have been well flagged, with the Government seeking to reduce the budget deficit over the next four years from 10 per cent to 2 per cent. Markets will be reassured by the fact that they are sticking to this goal.”

But the fact that cuts to public sector spending have not been as severe as had been feared has created some good news for investors.

Lees says: “Investment in transport has largely been protected and, in some areas, increased, which will be positive for certain stocks connected to the transport sector. In addition, if the Government expects to be able to recover the billions fraudulently claimed in benefits at the same time as cutting the budget for the departments that are responsible for benefits, there could be opportunities for some support services companies as a degree of outsourcing will be inevitable.” Karunathilake also says outsourcing is offering opportunities at the moment but says consumer cyclicals remain an area to avoid.

’If the Government expects to be able to recover the billions fraudulently claimed in benefits at the same time as cutting the budget for the departments that are responsible for benefits, there could be opportunities for some support services companies’

He says: “I have been avoiding UK consumer-focused stocks which are likely to be negatively impacted by the public sector job cuts associated with the review unless their valuations are particularly attractive. I continue to hold outsourcing companies which, over time, should benefit from increased opportunities to help government departments increase efficiency as they formulate plans to operate within tighter budgets.”

The bond markets have been equally as indifferent to the CSR as equity markets.

Schroders UK and European bond fund manager Thomas Sartain says the fact that the longer-term plan to deal with the deficit remains in place is more important to bond markets than any of the details announced last week.

Sartain says: “The CSR revealed few surprises for gilts – evidenced by the market’s muted reaction so far.

“The bond markets have responded positively to the coalition’s appetite to address the UK’s spiralling public finances head on. Sentiment towards gilts has been so positive that the risks were there would be a sign of a softening in the commitment to cut public spending or the “reprofiling” of cuts until later in the Parliament. In the event, the Chancellor delivered an outline of spending cuts largely in line with that contained in the June emergency Budget, with few unexpected announcements.

“The gilt market can breathe a sigh of relief that the commitment to reduce the deficit remains very much in place. However, the real challenge starts here, with the implementation of today’s announcements, particularly in the face of the recent slowing of momentum in the economy.”

Thames River global credit economist Felix Martin also says gilt markets were unmoved by the Chancellor’s plans as there was nothing unexpected. He says the direction of bond markets will now be dictated by the Bank of England’s attitudes to interest rates and whether the public’s stoic acceptance of the austerity measures starts to crack.

Martin says: “The big debate remains whether private sector demand will pick up the slack when the public cuts bite – and attention will now turn to the next Bank of England’s MPC policy decision on November 4 to see whether and how monetary policy will respond.

“There is little doubt that there will be devils lurking in the detail of the distribution of the cuts – with the reform of the local government financing mechanism in particular something to watch. The question will be whether the new opposition front bench can capitalise on these to reverse what appears to be the public general acceptance of the cuts’ agenda. If they can, then markets may start to price some flexibility into the coalition’s plans.

“So, on the macro front, it is over to you, governor King. And on the political front, it is over to you, Mr Miliband.”

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