Autumn Budget aftermath: What next for UK markets?

The UK Budget has finally passed with predictable grimness. It is unlikely to solve Britain’s multi-decade stagnation. UK-based investors can, however, capitalise on decline.

28 November 2025

The UK Budget was announced by UK Chancellor Rachel Reeves on 26 November, with a slew of measures - the so-called smorgasbord - unveiled in an attempt to fix the GBP 36 billion (according to the Office for Budget Responsibility) hole in Britain’s finances. A full analysis of the finer details can be left to others, the key point from a markets perspective being that the quickest and most obvious fix in the form of an increase in income tax had already been abandoned in favour of a variety of measures which could take longer to raise the required revenue and prolong the pain. Just one example being the so-called mansion tax which will be hobbled from the outset by valuation appeals and payment deferrals for those with insufficient cash to pay each year. The questions then become whether all of this is enough to pacify Britain’s restive bond and currency markets, what does the future hold for the economy and stockmarket, and how should UK-based investors approach it all?

UK gilt yields remain an area of intense focus because they influence asset prices and of course represent the cost of borrowing for the UK government. Since mid-2023 they have hovered around the elevated 4% mark and in 2025 more like 4.5%*. Some of this – just under 3% - reflects the higher predicted inflation that has haunted much of the global economy since 2022, and some reflects future growth of 1-1.5% in line with the Treasury’s survey of independent forecasters. But with yields of just under 4.5%* as of 27 November, potentially up to 0.5% is down to pure risk premium, ie a ‘nervousness factor’ imposed by lenders to the UK who are demanding more interest to compensate for the risk of lending to the UK government. We have of course been here before, with the ill-fated Truss government of 2022 seeing similar yields in the autumn of 2022. Gilt yields’ persistently elevated state today reflects at least in part a lack of conviction that the Budget - or indeed any other measure - is going to solve Britain’s fiscal challenges ‘once and for all’. Indeed it could be argued that to think otherwise would be naïve given the country’s profound demographic and low-growth challenges. If there is any consolation it is that the UK is not alone in all this.

All paying the price - the UK government is not alone in facing higher borrowing costs:

From 31 Dec 2004 to 27 Nov 2025

Sterling reflects similar concerns, with cable now trading at just USD 1.32 as of 27 November, off its summer USD 1.37 *high. And this is not an issue of dollar strength (though the greenback has stabilised recently), since measures of trade-weighted sterling are also down. Nor is it to do with low relative interest rates, since the Bank of England base rate of 4%* is higher than the eurozone, Canada and Japan, and the same as the US Federal Reserve’s upper bound target rate. Instead, the most persuasive explanation is one of a lack of confidence in the economy’s management. While it’s fair to argue that the UK is in a particularly tight spot right now, sterling’s long-term trajectory speaks of a longer tale of secular decline. On the eve of the First World War, the pound bought just under USD 5* but as the country’s global standing diminished so too did the currency. As such, it is hard if not impossible to make any serious case for UK revival while the economy sits both outside and adjacent to the world’s largest trading bloc while deglobalisation and tariff wars make independent trade deals highly challenging.

Contrasting with gilts and the pound, the performance of the UK stockmarket has been cited as evidence that the ‘declinists’ have got it all wrong about the UK and its prospects. And it’s true that the MSCI UK Index is up over 22.0%* as of 27 November, ahead of the MSCI AC World’s 18.5%* in local currency terms. But this reflects more global capital’s desire for diversification from the AI-dominated US index as well as the idiosyncratic nature of the UK stockmarket rather than any particular vote of confidence or otherwise for the UK economy itself. Of course, the UK market offers some exposure to consumers in Britain but many of the drivers this year have been broader in nature. For example, pharmaceuticals have fared well off the back of innovation and drug breakthroughs, and energy firms have benefited from rising oil and gas prices. Meanwhile UK IPOs (Initial Public Offerings) have been drying up for years and investors – this year aside – have generally ignored what is seen as a shrinking market. While the Budget had been rumoured to encourage more investment in UK stocks, these measures did not materialise. The reality is that Britain does not have a widespread equity culture in the way that America does.

The FCA’s 2024 Financial Lives survey for example revealed that just 17% of adults had a Stocks & Shares ISA (Individual Savings Account). This, coupled with the fact that the UK accounts for just under 4%* of the market capitalisation of the MSCI AC World Index, suggests that an allocation should not loom large in globally facing investors’ imagination. In fact, sterling’s long-term decline - and the not unreasonable assumption that it will continue over time - is itself a good reason to remain invested primarily in international markets whose returns will be boosted when translated into a declining pound. This also speaks to a broader structural point for UK-based investors. With (presumably) real estate and potentially also business interests in Britain already, to go and add a UK-focused investment portfolio to the mix feels like tempting fate. Other stockmarkets offer currency and sector diversification and almost no (as opposed to some) exposure to the UK domestic economy.

Super-secular – the pound’s decline now has a certain inevitability to it:

From 31 Dec 1990 to 27 Nov 2025

November’s Budget offers both nothing and everything for UK-based investors. The economy clearly remains trapped in stagnant growth with successive governments struggling to deal with ever-higher demands for entitlements from an ever-shrinking working population. In seeking to plug the inevitable fiscal gaps the Budget has served only to highlight the sheer scale of the challenge the economy and the tax base faces. This is inevitably radicalising the country’s politics both on the Left and the Right which itself will likely result in poor policy choices that only compound the challenges (think lack of welfare reform and calls for outright tax cuts respectively). As bleak as all this is, UK-based investors should be empowered in two ways. The first is from the certainty that Britain’s decline is longstanding, painfully familiar and likely fated to continue. As renowned economic historian Corelli Barnett once wrote for the BBC, “The [Postwar] Labour cabinet attempted to accommodate the costs of the new welfare state…this served to handicap much-needed modernisation.” This knowledge then leads to the second conclusion, that herein lies a strong foundation for a long-term investment structure – one that looks globally and whose returns are amplified by a domestic currency that mechanically reflects long-term stagnation. From this perspective, the Budget has been a useful exercise in confirmation.