Henderson's Smith taps consumer need for value ahead of Budget squeeze

Henderson High Income is investing in stocks offering value for money to consumers who are braced for a further hit in the November Budget.

Janus Henderson’s David Smith is tapping into UK stocks offering consumers ‘value for money’ as concerns loom that the Budget will further stall the economic growth the country enjoyed in the first half of the year.

Smith, manager of the £326m Henderson High Income Trust (HHI ), typically invests in more ‘defensive yield-types’ of stocks in areas such as consumer staples, utilities, and also ‘some cyclicals where we see value opportunities’.

Finance is a ‘key area’, encompassing banks, life insurers, and financial services, but the latest theme Smith is playing is ‘value for money, where we own domestic cyclical businesses that offer value to consumers’.

This includes Whitbread, owner of budget hotel chain Premier Inn, homeware retailer Dunelm, which is on the ‘value end of retail’, and Telecom Plus, which is a mutli-utility supplier that offers discounts for consumers.

‘Overall [household] balance sheets in the UK are in a strong position but the lower 20% of the population is still in a tough position and we are finding companies that can help them,’ he said.

Smith is surprisingly upbeat about the state of the nation given the growing concerns about the potential for increased taxes and spending cuts in the Budget in November.

‘Clearly the chancellor needs to raise more money and from estimates we’ve seen it’s somewhere between £20-30bn,’ he said.

He said the economy this year has followed a similar path to 2024: ‘We had a good start to the year with economic growth and then Labour got in and talked the economy down, talked about the black hole, and economy growth stalled.’

This year, first half growth had been better than expected and then the government started to talk about another blackhole and tax raises, with stamp duty and wealth taxes making headlines.

‘It has been very unhelpful in creating uncertainty. That uncertainty will impact confidence and sentiment for both businesses and consumers.’

Smith said the government is in a tough position as it needs to raise money while adhering to its manifesto pledge not to touch income tax, national insurance (NI), or VAT. It also needs to ensure it supports economic growth without importing inflationary.

However, he said chancellor Rachel Reeves is unlikely to renege on her fiscal rule to ensure day-to-day spending is matched by income, given the volatility of bond markets.

In July, bond yields surged after Keir Starmer failed to immediately back the chancellor, who was seen crying in the House of Commons after being forced to U-turn on welfare cuts, sparking fears that she would be replaced.

‘The bond market was telling the government we like the fiscal rule and if someone does not have that then bond yields will go higher and that is a bigger issue for the government,’ said Smith.

The government may have talked down the economy but Smith said the fundamentals of the UK economy are ‘not as bad as we’ve been led to believe’.

Looking at the level of consumer finance, it is in ‘good health’.

‘There has been a trend since the global financial crisis of people paying off debt and putting money in savings,’ he said.

Corporates are also in a strong position and banking sector is ‘very well capitalised’.

‘When you look at that in context of the external shocks we have seen – Covid, war, hyper-inflation - GDP growth of 1.3-1.4% a year is better than expected and we have avoided a recession despite some people thinking will dip into one,’ he said.

‘We have the finances to take what is thrown at us.’

HHI has ridden the rotation out of the US and into UK and European stock markets this year, with a net asset value (NAV) rise of 12.2% and a share price gain of 14.8%, leaving the trust trading at a discount of 7.3%.