By Michael Browne, CIO of Martin Currie
We can point to a myriad of factors: Global and domestic political uncertainty has been front and centre: from Putin to Truss, from the Middle East to Taiwan.
For the first time in 15 years, you have a real return from short term interest rates as central banks squeeze the inflationary shock from the system. Why bother with anything else? Can the economy survive these rates without a recession? The recent UK election was fought and won under the slogan “stop the chaos” and “change and rebuild” not hope and prosperity.
Since then, the PM and his Chancellor have gone out of their way to explain how things are much worse than they thought and have raised the prospect of significant taxes on wealth and savings because they have ruled out taxes on incomes.
Confidence is key to help prime UK recovery
The key determinant of UK is confidence: And that sits firmly in the hands of the new Government. If they can produce a budget that is fiscally neutral, which the Bond market likes and that does not dilute the post tax returns for investors too much, then confidence will flow. The MPC at the Bank of England will feel able to cut rates, foreign investors will see this a ‘New’ not ‘Old’ Labour and the recent rally in Gilts and Sterling will continue. As interest rates fall, the economy will recover but the incentive to hold cash will fall. It’s hard to know how attractive the USA will be in 2025 after their election. But it’s clear the UK can be attractive after our one!
Will pension and wealth funds increase their UK equity allocations?
Have UK pension fund and private investors sold out? Not everything but big institutional funds and wealth advisors moved to tracking global indices for their clients quite recently, cutting the holding of UK equities to just 4%3. At that level there is little left to sell.
So, the major stumbling block remains interest rates. Why bother when I can get 5%? But how long will those rates last? Sure, you can lock in for a year or so but what then? A good UK equity fund will yield at least 4% and that yield should grow.
Taxable pain
Sir Keir Starmer was quoted at the end of August saying that the autumn budget would be ‘painful’ with as much as £40 billion in tax rises expected.
We are expecting increased Employers’ National Insurance (and National Minimum Wage), Capital Gains (CGT) and Inheritance Tax (IHT). But what could be the unintended consequences of these?
If CGT is raised on stocks and shares, but not on property, we are likely to see that capital directed towards ‘buy to let’ rather than investment in companies. This in turn will drive up house prices, making them less affordable. On the other hand, a rise in IHT, could lead to the elderly selling their main assets, i.e. their homes and move into rentals. While this may improve the supply of properties it could actually reduce the overall tax take. Finally, if ISA allowances are capped or reduced this will force investments into other areas, if combined
with the CGT changes described above this could make less money available to be invested in equities. Instead, this cash may be used to pay off mortgages or other wider debts.
When the government is looking to boost long-term investments and raise pension fund holdings of UK assets, these risk having the opposite effect. We will not know until the budget is announced, but we would be surprised if there weren’t major changes driven by taxation.
But, the other side to having higher tax rates and therefore a tighter fiscal policy opens the door to rate cuts and looser monetary policy from the BOE. This makes for a more attractive environment for UK equities.
M&A is rising and so is investment in the new economy
So why invest in the UK? Why not join the flight and ‘Go West’ to the Artificial Intelligence (AI) boom? Worth remembering the Sir John Templeton quote “To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic”
Is the UK cheap? Absolutely and the more you move down the market caps the cheaper it gets. How can we be sure of that? Just look at what the corporates think: M&A has risen by two thirds in value this year to £68bn1.
It is not just that M&A has picked up in the last year, there is a wider willingness by the new economy to invest in the UK. According to the Artificial Intelligence Index Report 2024, from Stanford University, the amount of Private Investment in AI, in the UK, from 2013-23 is US$22.25bn2. Whilst this is dwarfed by the US and China, it is still the third largest amount by country and as much as Germany, France and Switzerland combined.
