Trevor Greetham, the director of asset allocation at Fidelity, says Britain is under less pressure from markets to cut government spending than is commonly believed.
Greetham says: “The UK is not Greece. A country with its own currency can devalue its exchange rate or print money to finance government spending. Ironically, public spending cuts could lead to a further increase in government debt if they push the economy back into recession.
“We expect the Bank of England to print more money in an attempt to boost activity and we wouldn’t be surprised to see sterling weaken over the next few years.”
Greetham says the UK’s “tepid economic recovery already looks to be petering out with house prices falling again”. (article continues below)
He adds “Holders of gilts will always be repaid in nominal terms. Their main concern, that of runaway inflation, is a remote prospect. Stripping out changes in VAT, UK consumer price inflation was just 1.3% in September and unemployment is likely to remain high. This is hardly the backdrop for a wage-price spiral to set in.”
Meanwhile Peter Lees, the head of UK equities at F&C, says equities and bond markets would find little to either excite or shock them in the consumer spending review (CSR).
Lees says there is a couple of sectors of the UK market whose prospects could be boosted as a result of the spending review.
He 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.”