Cazenove Capital comments: Will a new government unleash the UK’s animal spirits?

Cazenove Capital’s Kate Leppard, Head of Client Service, assesses the potential impact of a new government with Schroders’ Sue Noffke, Head of UK Equities, and Jean Roche, UK Fund Manager. 

Kate Leppard (KL): Heading into the election, how do you think business leaders are feeling about the prospect of a change of government?

Sue Noffke (SN): From what I am hearing, they are relaxed about it. The Labour Party has been on a charm offensive with businesses and the City for months now and it has paid off. Since the election was called, there’s been a little more concern about the reality of an inexperienced government with a lot of new MPs. But behind the scenes, there’s been a lot of coaching and consultation with business leaders, which is reassuring.


There are some sectors that are in Labour’s sights from an ideological point of view, such as train operators. But my sense is that most business leaders are comfortable about a Labour government.

Jean Roche (JR): Absolutely. I speak to a lot of smaller companies and the message I hear is that they want stability. I think many are relieved that the election is taking place earlier than we were anticipating.

KL: Rachel Reeves is very pro-business but others in the party are much more focused on workers’ rights. Do you think they’ve got the balance right? Does the division concern you?


SN: I think we’re probably going to see more of the same. Both the Conservatives and Labour have signed up to the national minimum wage and it’s already proving a constraint for businesses that employ a lot of people.

Higher wages are driving a shift towards investment in technology at the expense of labour, such as the self-service check-outs you now see in most supermarkets. Higher labour costs may also be a factor behind the recent tick-up in unemployment.

At the same time, lower earners need rising wages because they’ve borne the brunt of the cost of living crisis. I think both parties recognise this.


It’s possible we see some more industrial unrest. But we’ve already seen a lot under the current administration, whether on the railways, in education or the health service.

JR: One area where we could see improved prospects for workers is in retail. Both parties have spoken about changes to business rates, which should in theory level up the rates paid by online retailers compared to bricks and mortar rivals. Elsewhere, I’m also seeing a lot of investment going into technology. We’ve heard from several companies that AI is working well when it comes to directing customer inquiries and complaints to the right place and saving significant man hours.

KL: Are you seeing any “green shoots” in the UK economy?


JR: Very much so. Our banking analysts have noted a pickup in UK corporate lending, which suggests companies are feeling more optimistic. There’s a lot of takeover activity, with companies feeling confident enough to make some brave moves. And we are seeing exciting things happening in UK markets. Last month, Raspberry Pi floated at £2.80 and hit £5 a few days later. The perception that growth can happen here is increasing.

SN: I agree that we’re seeing a lot more optimism in the capital markets. Jean mentioned the Raspberry Pi IPO, but we’ve also seen large, successful placings — such as the sale of shares in Haleon by GSK and Pfizer or Natwest by the UK government.

I think the death of UK equities has been much exaggerated. Under the bonnet, there’s a lot going on, even though valuations remain quite low, which is why there’s this huge amount of takeover activity. It’s not just domestic companies buying each other, by the way. Private equity and foreign companies are also making significant investments in the UK, suggesting they are also feeling more confident about the outlook.


This optimism hasn’t fully filtered through to consumers yet. Households are under pressure from higher refinancing costs, but they still have pandemic savings and are benefiting from higher interest on savings. More comfort on politics could unlock some of that.

KL: Is the optimism translating into higher capital spending?

SN: The current government has extended the “super-deduction” which lets companies offset capital investments against taxes. That has encouraged more spending amongst larger companies. However, we are still seeing quite a focus on share buybacks from companies of all sizes because valuations remain so low.


JR: We’ve done some interesting work on buybacks. Traditionally, around 40% of US companies bought back 1% or more of their shares per year, compared to 20% here. But the UK figure has ramped up closer to 40%. We’ve been encouraged by evidence that buybacks haven’t jeopardised capital spending or dividends. Through judicious cash flow management, companies are managing to buy back shares on top of these other demands for capital.

KL: One topic some of our clients could be concerned about is the end of Business Relief. Many companies listed on AIM qualify. Do you see this as a risk for smaller companies?

SN: There’s so much that is “oven ready” in terms of capital market reform, such as making it easier to float and undertake M&A. There’s real momentum behind these initiatives, so I don’t think this is an area a new administration will be focused on for now. I suspect they’d also be concerned about hurting the AIM market.


KL: There’s talk of trying to get a better trade agreement with the EU. What would it mean for businesses?

JR: I think a few new faces in the room could really make a big difference and help negotiations with the EU.

SN: There’s still a lot of scope to broaden access to the EU for the UK’s financial services sector, as well as professional and creative services. There are stories of musicians not being able to perform in Europe due to red tape, for instance. It won’t happen overnight, but we could see progress in areas where we have real leadership.


KL: You touched on foreign companies buying in the UK. Do you think we could also see more interest from international investors?

SN: Yes, I think if overseas investors were worried about the outlook for the UK, we’d see it in sterling and the bond markets. Both have been very stable over the past few months.

It seems bizarre to say this, but I think it’s probably helpful that we had the “mini-Budget” blowout in 2022. It has shown everyone what’s not possible and Rachel Reeves seems to have really taken the lessons on board. There is still some concern among business that taxes will rise, if there’s a shock or growth doesn’t come through. It’s not being talked about today, but it could come in due course.


JR: Growth is key to so much. Tony Blair has said that it’s difficult to govern without at least 2% GDP growth. Today’s Labour party really seems to have heeded his advice, which is why they’ve been supporting business and the City so actively.

SN: On that note, one of the most notable comments I’ve heard was from a seasoned UK executive who has led several FTSE100 companies. Far from being concerned about the prospect of a Labour government, he suggested that this could be a 1997 moment that brings some real excitement about the UK. “Things can only get better,” he told me, referring to the song of that name famously played after 1997 election victory. I understand that the band D:Ream has recently said that it cannot be used in any future political campaigns!

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