Written by Ashwin Gurung
Last week, the UK Government announced the much-anticipated Budget, setting out how it plans to raise money and manage public spending over the coming years, while aiming to rebuild confidence after a period of weaker economic growth. The Budget delivered no major surprises and included around £26 billion in additional tax revenue, addressing earlier concerns about a potential ‘black hole’ in the UK public finances. This allowed the Office for Budget Responsibility (OBR) to estimate that the government has around £22 billion of “fiscal headroom” – the margin by which its plans remain within its fiscal rules, providing a buffer for extra spending or tax cuts without breaching its commitment to budget stability.
The OBR expects the UK economy to grow by 1.5% in 2025, before slowing to 1.4% in 2026, signalling a somewhat weaker outlook. Inflation is expected to remain above earlier forecasts, 3.5% in 2025, before easing to 2.5% in 2026, meaning the cost of everyday goods and services is likely to remain relatively high in the near term.
While the economic outlook was somewhat soft, it largely came as expected. With no major surprises in the UK Budget, it helped somewhat ease near-term uncertainty over public finances, resulting in a calm UK bond market. This contrasts with September 2022, when Chancellor Kwarteng’s mini-Budget triggered a sharp market sell-off due to unfunded tax cuts and fears of reckless spending. UK government bonds have attracted significant investor interest recently. That said, we still view UK government bonds as relatively less attractive compared with global bonds or local-currency emerging market bonds, given the unique challenges the country faces and the fact that the potential returns don’t clearly compensate for the risks and liquidity constraints.
Meanwhile, UK equities reacted somewhat more positively, as some sectors, such as banks, benefited as the Chancellor decided against imposing additional levies on their profits, which partly drove the FTSE All-Share Index up +2.2% over the week, with Financials representing 28%. The FTSE 250 Index, which is more closely tied to the UK economy, also rose +3.8% over the week.
In the US, markets were lifted by growing confidence that the Federal Reserve (“The Fed”) may cut interest rates in December. The odds of a cut have jumped sharply in recent weeks, with markets now pricing in an 88% probability, while the Fed continues to weigh the trade-off between supporting the labour market and keeping inflation in check. Smaller, US-focused companies did particularly well, with the Russell 2000 Index up +4.2%, while longer-dated Treasury bonds also gained, as the Bloomberg US Treasury 20+ Years USD Index rose +0.8% in USD terms. Meanwhile, tech giants held their ground, with the Nasdaq-100 Index returning +3.6%, despite ongoing talk about a potential AI “bubble”.
Elsewhere, Japanese markets were supported by stronger-than-expected retail sales and industrial production, with the MSCI Japan Index rising +1.4%. During the week, the Japanese government also finalised a $117 billion supplementary budget, mostly financed through new debt, which added further pressure on the yen given Japan’s already stretched public finances. Persistent yen weakness and above-target inflation have raised expectations of a possible Bank of Japan interest rate hike in December.
This year’s broad mix of evolving market themes continues to highlight the importance of a diversified and disciplined investment approach as the most effective way to navigate ongoing uncertainty.
All performance figures are stated in Sterling terms, unless otherwise specified.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
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The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 1st December 2025.
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