Asset Allocation Observatory: UK election special

By Richard Flax, Moneyfarm Chief Investment Officer

The Prime Minister has called a General Election for 4 July, with Labour ahead by around 20% in the polls. Given that lead, a sizable Labour majority is overwhelmingly the most likely outcome. Opposition parties don’t usually lead by 20% if the country is in a happy place.

From an investment perspective, there are a few things to consider.

First, there’s the question of why now? Sunak in theory could have waited until the autumn to call an election, hoping that better economic data could improve consumer sentiment. Perhaps this means that the Prime Minister and his advisors aren’t so optimistic that the economy will improve over the next few months. That might be overthinking things, but it does put a dampener on the message of lower inflation and slightly better growth.

Second, what could we expect from a new Labour government? Given that the election is theirs to lose, perhaps it’s not surprising that Keir Starmer hasn’t yet said too much about their plans. He has stressed the need to create stability for British business, which would be welcome news. But that still leaves the open question of the day after. They’ve tried hard to dispel the idea of higher taxes, but there’s always a residual fear that an incoming government, of whatever stripe, will raise taxes. You wouldn’t be too surprised if Rachel Reeves stood up after two months in parliament to say something like “Terribly sorry, it’s all much worse than we realised, we’ve got to raise taxes after all”. That sort of uncertainty doesn’t really help UK financial assets.

It will be interesting to see how changes – like the abolition of non-dom status – play out. Likely some of the 68,000 declared non-doms have already begun to take steps to reduce their presence in the UK. Could that have an impact on the tax base? It’s a small number of households, but the UK tax base is quite narrow. As an example, according to the House of Commons, the top 10% of income taxpayers contribute around 60% of income tax receipts.  In a similar vein, would a Labour government reinstate a lifetime pension allowance? We’d guess not for a while and probably not back to the same level. What about the prospect of VAT on private school fees? It seems likely, but we think there’s a decent chance it could be fiscally negative as more students head to the state sector, whatever other considerations there may be. 

As is often the case, the challenges go beyond political parties. As the IMF noted, the UK already faces fiscal difficulties – not least a high tax burden and rising debt to GDP – this week. A lot of that could be improved with faster growth. An incoming government would be hoping for the economy to re-accelerate in the coming quarters, not least to boost tax collections. That could be fine in the short term, but sustainably higher growth is difficult to engineer. 

Where does this get us? An incoming Labour government will try hard to reassure businesses and lenders (aka bond investors) that they’re in safe hands. But the starting conditions of slow growth, a high tax burden and under-investment in infrastructure create a difficult set of challenges for any policy-maker.

We do see value in UK assets but it’s still correct to argue for globally diversified portfolios, even if the UK isn’t alone in facing these types of challenges.

Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed-income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.