Well today’s announcement of a Labour Government brings no real surprises.
At the point of writing this article; UK and Global Markets were relatively unaffected as they had seen this likely outcome for many months. Sometimes ‘predictable’ is good – especially when it comes to the stability of our clients’ investment portfolios.
So what is our early analysis and how do we think the new Government will likely impact upon investment portfolios in these early days?
I thought it might be handy to deal with this as a bit of a time line of what we might experience in the first few months of this Government. Of course, we could be completely wrong in our observational guessing – but here goes!
July
On the 9th of this month, the new PM will attend the three day NATO International Summit in Washington. This will be a great opportunity for Kier Starmer to settle any Allies nerves about the UK’s commitment to continued global security. It also starts a process of trying to build solid relationships that the new Labour Government hopes will bring much needed economic growth.
On the 18th of this month. The new PM then also gets to chair the European Political Community in Oxfordshire – again allowing him to build valuable relationships.
Whilst Sir Kier is wooing potential trading partners and allies – his new ministers will be abolishing the Rwanda plan, reversing the onshore wind farm bans, reviewing UK military capabilities and attempting to negotiate with Junior Doctors over their pay demands.
Watch out as well for a huge reworking of the national planning policy framework – to free up planning for more houses and to target local councils to build more homes.
On the 17th of July, we can look forward to the Kings Speech where we expect to see more power handed to third party – tax payer funded bodies such as the Office for Budget Responsibility. This is designed to ‘bring along’ all those civil service/ regulatory bodies who have been at odds with the UK Government for so long.
In addition, the ‘make work pay’ agenda will likely be prioritized – with penalties for employers operating on zero hours or ‘fire and rehire’ principles.
Watch out as well for the centrepiece ‘GB Energy’ based in Scotland to invest into Nuclear and Renewable Energy projects. The new Government will be hoping this can offset the potential exodus of UK based energy companies due to higher taxation.
August
On the 1st of August, the Bank of England Monetary Policy Committee will meet again. Expect to see a potential cut in interest rates as well as a change to the Bond selling programme designed to ‘kick-start’ the economy in line with labours plans. Mr Sunak and co will likely feel aggrieved when they see this – but the writing is on the wall for looser monetary policy from the BOE. In our opinion, they should have moved sooner on this and it may already be too late to prevent deflation.
At the same time, we expect to see a large amount of new Lords appointed by the new Labour Government – to boost their chances of getting legislation through in the coming months and years.
September
September will be all about party conferences. Whilst the Conservatives lick their wounds and probably enter some form of internal punch up – the labour conference will be all about ‘undoing 14 years of economic stagnation’.
October
This is the month we are watching as Rachel Reeves (the new Chancellor) delivers her first Budget.
We already know that she is looking to tax non-domiciled residents in the UK and that she will seek to place VAT on Private School Education Fees as well as expanding the windfall tax on Energy Companies.
However, this is not likely to be enough to really move the dial in terms of instant ‘rebalancing of the books’ to pay for all the new things that the Government wants to achieve. This is where we watch for ‘wealth taxes’.
The two likely targets will be Capital Gains Tax and Tax on Pensions.
We think that Capital Gains Tax on investments could get realigned to income tax levels – so a basic rate payer will go from 10% to 20% with a higher rate payer going from 20% to 40%. That begs the question – ‘will second home sales be subject to 28% and 48%?’ – anything is possible.
This Government are unlikely to be any friend to the property landlord or second home owner – so we are bracing for big potential hits in this area.
There is a chance that Labour goes after larger Pension pots again – reintroducing the lifetime allowance – perhaps with a special break for medical professionals. There is also the worrying possibility that she elects to limit Pension freedoms – possibly pushing back personal pension retirement ages, reducing the tax free cash or linking it to specific annuity requirements.
The other area we could see Mrs Reeves seek to correct, is underinvestment in UK companies by large Pension funds. The amount of large Pension funds that barely invest in the UK stock market has become quite bewildering and something of an act of ‘self-harm’. Any intervention here could really make a difference.
To sum this all up, I thought I would revert to a film title – ‘The good, the bad and the ugly’!
The Good:
There can be no doubt that the governing of our country has become fairly dysfunctional over the past five years. Too many factions have fought one another and ultimately government is only as good as its administration. We are hopeful that Civil Service departments and Third Party tax payer funded bodies will seek to now align themselves to the governments vision. This should create a period of stability – which usually helps portfolios.
If the new government can come up with bold plans to force large pension funds to back UK companies – we could see a ‘boom time’ return for UK Equities and a real boost to our own economy. This could really help our medium and higher risk portfolios.
The likely interest rate cuts and structural changes by the Bank of England should really help lower risk portfolios by lifting Bond prices – we have been waiting a long time for this.
The Bad:
The new Labour Government inherits a really tax heavy set up – this massively suits them. The promises from Mr Sunak to cut taxes will be lost in the ether.
Whilst the UK ‘cupboard’ is bare – we may not need to see huge rafts of tax rises to restock it over time. However, I think it will be very hard for the new government to truly stimulate the UK economy with such a long term high tax burden.
Property landlords and small employers may also be concerned about their property or business investments with the potential for a pincer movement of higher taxes coupled with tighter regulations.
Smaller Private Schools may close as they have already been struggling to compete with public sector teacher pay.
Those with personal pension pots in their 50’s may feel very nervous about the potential tax raids they could experience.
Finally, those pesky non-Dom’s may well ‘up sticks’ and take their money elsewhere. Whilst it is politically attractive to target those who are not contributing their taxes – the economic weight of the big spenders withdrawing is obviously a risky counter problem.
In the case of our client portfolios – we have already been manoeuvring away from the CGT arena as much as possible. We haven’t held property within the portfolios for over a year and we are already quite UK Equity heavy. We will continue to keep our ear to the ground and carefully advise you all as we get the facts in regards to Pension changes and CGT dangers. You know me – I love making a video!
The Ugly:
Sir Kier (love him or loathe him) inherits a pretty tough gig. The UK is in a lot better shape than it was a year ago – but still – there are structural changes required which need careful navigation.
Everything is underpinned by his teams promise to ‘grow the economy’. If this doesn’t happen – he won’t be able to blame the Conservatives for ever. For now…..he has some breathing space…..but ultimately he will fear his deputy and the trade unions turning on him if his plan doesn’t work.
I believe we have a period of potential calm ahead of us now (barring any global pandemics or acts of war) There is the opportunity for investors to quietly pick up some nice profits. Careful tax planning will be critical – alongside diligent diversification and monitoring to get the very best out of a new era.
I am quite calm about the coming 18 months and we are absolutely ‘on it’ in terms of watching for developments as they come. If you are worried about anything at all – please just let me know. We are here for you 100%.
My best wishes. Darren
