- Markets likely to remain calm even if Labour win a super-majority.
- Efforts will continue to avoid bond markets turbulence.
- Uncertainty still surrounds prospects for a CGT rise under Labour, although it’s far from clear if this would happen.
- A pledge to establish closer ties with Europe may be welcome for many investors given the Brexit effect on valuations.
- A result leading to a coalition government could cause some volatility.
- British ISA plans may be put on ice.
- There appear to be no plans to cut stamp duty on UK share purchases or increase the dividend or capital gains tax allowances.
- Changes to advice guidance boundary rules expected to progress.
- Investors should maintain a keep calm and carry on attitude.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
“While chatter around the impact the General Election result is set to ramp up again, the impact on financial markets is likely to stay minimal especially if the current poll predictions materialise. Even a Labour super-majority is unlikely to dramatically unsettle investors. It would enable the new government to get on with their agenda, which has largely been digested by markets. Anything other than Labour dominance is more likely to be unnerving given expectations. It could weaken the position of Keir Starmer and his ministers and hamper their ability to drive change.
An emphasis on keeping bond markets calm
Shadow Chancellor Rachel Reeves has made it clear that if she becomes Chancellor, she intends to be economically responsible, and focus on stimulating long-term growth, rather than immediate boosts to consumer spending power. She wants to avoid sparking the kind of bond market turmoil, which erupted after Kwasi Kwarteng’s mini-Budget. That’s why there were no surprise announcements in the manifesto, with the party being super-careful about pledging changes to spending or fiscal rules that could rattle financial markets. The priority will be on keeping the waters calm in the aftermath of the election, even with a super-majority. There may be some minor announcements before an expected budget in the Autumn in a bid to build trust.
There is more of a risk of market turbulence after a few years of a new government bedding in, especially if the economy took a turn for the worse and the tax take dips. It would be very hard for Labour to cut services and do anything drastic with public spend and they appear to be in a bit of a tight spot with their fiscal commitments. However, Rachel Reeves has suggested that in the future borrowing rules could distinguish between day-to-day spending and investment to propel long-term growth, potentially loosening the purse strings to further support and partnerships with the private sector, above and beyond the current manifesto commitments. So far, such indications do not seem to have perturbed the debt markets, with bond investors appearing to be more sensitive to interest rate speculation than the investment plans of an incoming government.
Uncertainty surrounds potential increase in CGT in the future
Questions remain about whether Labour could increase capital gains tax in the future but it’s still far from clear if this would happen and what form it would take. However, valuations, which have been languishing lower partly due to the Brexit effect, could be positively impacted if Labour wins, given recent pledges for closer trade ties between the UK and the EU and less of a focus on regulatory divergence.
Impact of a minority administration
A minority administration or coalition would be more unsettling as it would mean more uncertainty and it may hamper bringing in Labour’s agenda, and potentially hold back investment due to the need to integrate other parties’ promises made on the campaign trail. However, pledges on certain sectors such as tougher fines for water companies still probably would not be rolled back, given recent public outcries.
The British ISA could stay on ice
There has been a lot of talk about the potential for a British ISA to help kickstart more investment into the London Stock Exchange – however, there was no mention of it in the major parties’ manifestos. Both Labour and the Conservatives have said they want to encourage saving and investing. This could be done through lifting the overall ISA allowance, rather than introducing another layer of complexity.
If the aim is to make investing in UK equities more attractive, there are other measures which could be used. All too often, retail investors are cut out of IPOs and secondary capital raising rounds. It’s essential that the FCA Review of the listing regime puts improving retail investors’ rights at its heart. There was no mention in the manifestos of cutting stamp duty on UK share purchases or increasing the dividend or capital gains tax allowances, which may disappoint some investors.
Advice/guidance boundary rules expected should progress
It was disappointing we didn’t get any mention in the manifestos of all the great work that has been done to help clarify the rules around helping people get to grips with their finances. Currently financial advice is well regulated, but it’s costly and so is only used by a small proportion of people. Firms can provide guidance, but can’t currently personalise it, or use it to drive people towards positive outcomes, without it being classified as advice. So far, in the review of the boundary between guidance and advice, the FCA and Treasury proposed a new category of targeted support, so providers could make recommendations based on what ‘people like you’ should do. This would make the information more useful, without crossing the line into advice.
Given the support from across the political spectrum for this idea, it’s to be hoped that this was eased out of the manifestos purely on grounds of space. A new government has the opportunity to accelerate this process to a conclusion, and it would be a crying shame if an election did anything to hamper its progress.
The NatWest share sale
Although the NatWest share sale has been put on ice, due to the General Election campaign, it was mentioned in the Conservative manifesto as still being part of the plan. It was omitted from the Labour manifesto but there are hopes it will still progress.
Schemes like this have the power to encourage new investors, so ideally this will be revisited. Research from HL shows that past privatisation schemes brought in newcomers and super-charged investing habits for many novice shareholders. 25% of people say they invested in privatisations between the late 1970s and 2014. Of this group, a third of people (34%) still hold at least one of the companies they invested in, so schemes like this do have the power to incentivise people to start on an investment journey.
Keep calm and carry on
Ultimately, the attitude investors should take amid some uncertainty about what could lie ahead under a new administration is keep calm and carry on. Keep your eye on long-term goals, and stay diversified across a range of sectors, asset classes and geographies.”
