An eventful month for UK equity investors

In a month largely dominated by negative newsflow – ranging from concerns over the sustainability of the economic recovery and the long-term effects of Chancellor of the Exchequer George Osborne’s planned spending cuts.

To the continued fallout from BP’s catastrophic oil leak in the Gulf of Mexico – investors’ appetite for risk dwindled and share prices fell. Over the second quarter of 2010 as a whole, the FTSE 100 index declined by 13.4%.During the month, the Chancellor announced a series of controversial spending cuts and tax rises in the coalition government’s emergency Budget, aimed at bringing down the UK’s massive budget deficit. Measures included an increase in VAT from 17.5% to 20% from January 2011, and increased capital gains tax for higher-rate taxpayers.

Most government departments will undergo substantial real budget cuts, while various benefits are to be cut, capped or frozen. Meanwhile, the Government is to introduce a bank levy – on UK banks, building societies and the UK-based operations of international banks – that is expected to raise £2bn per year. Reaction to the measures was mixed with some critics protesting the spending cuts could trigger a “double-dip” recession.

The share price of beleaguered oil company BP proved particularly volatile during the month. Since an offshore rig exploded in the Gulf of Mexico during April, BP’s share price has fallen by more than half. Nevertheless, the company’s share price experienced some sporadic upward movement during June amid speculation that BP might become a target for a predator. However, some analysts believe the prospect of a takeover bid remains unlikely while BP’s liabilities remain unquantifiable. Under intense pressure from the US government, BP announced the cancellation of its dividend for the next three quarters.

UK retail sales registered stronger-than-expected growth during June, boosted by strong demand for televisions to watch the football World Cup. However, consumer confidence continued to fall while UK inflation dropped more quickly than expected during May, held back by lower food prices and slower price growth for petrol and alcohol.
Food retailer Tesco reported stagnant quarterly sales growth as the company struggled with lower food prices. Management blamed high fuel prices that left consumers with less money to spend elsewhere. Nevertheless, US investment guru Warren Buffett has continued to add to his holdings in Tesco and now owns more than 3% of the company through his Berkshire Hathaway investment company.