What next for the UK?


18 Jun 2024

As the UK heads to the polls, what could the next five years look like for institutional investors. Chris Newlands reports.


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As the UK heads to the polls, what could the next five years look like for institutional investors. Chris Newlands reports.

After a lot of second guessing by political analysts, prime minister Rishi Sunak surprised even most of his own party by calling for an early July election.

Stood outside 10 Downing Street in the driving rain, with Tony Blair’s 1997 general election soundtrack Things Can Only Get Better by D:Ream being blared out in the background by protestors, Sunak told the nation to prepare to go to the polls on July 4.

Most had anticipated an Autumn election, allowing the Conservatives time to perhaps hold a pre-election Budget in which chancellor Jeremy Hunt might have been able to offer voters a sweetener in the form of tax cuts or a further drop in national insurance contributions.

But on the same day the election date was announced the Office for National Statistics said public sector net borrowing had increased to £20.5bn in April, the fourth-highest April total since records began, seriously denting Hunt’s wiggle room for policy measures such as tax reductions.

And just days before that the International Monetary Fund had warned the Tories against further tax cuts unless they were “credibly growth-enhancing and appropriately offset by high-quality deficit-reducing measures.”

In the end Sunak ran out of road and opted for a summer election.

But the problem he faces now is that Labour, the UK’s main opposition party led by Sir Keir Starmer, are the overwhelming favourites to win, which will not only have major repercussions for the way the country is run but could have significant implications for the way the UK’s giant pension industry operates and invests.

According to The Guardian, which tracks the latest polling averages based on all major British polling companies, Labour are the clear favourites to succeed at the polls. At the time of writing the figures show 44% of voters would back Labour at the July election, with the Conservatives trailing behind at 23%.

The average betting odds, meanwhile, point to Labour as the 2/17 favourites to secure a majority government – translating as a 90% chance of victory.

A pension fund consultant, who advises on investment decisions but asked to remain anonymous because of the sensitivity of talking about political views, said they have been talking to clients about the possibility of a Labour win for some time. “It has felt inevitable for a while now,” they said.

Evidence supports that, with the Conservatives suffering a resounding defeat in the April local elections, losing 474 seats in parliament. Sir Keir’s party picked up 186.

Labour politician Sadiq Khan, meanwhile, was re-elected as London’s mayor, with Labour also snatching a narrow victory in the West Mid- lands, home to the UK’s second-largest city of Birmingham.

Beyond the ballot box

So what are the implications of a Labour government for pension funds, particularly regarding investment allocations?

In short, experts say that in terms of valuations water companies and the oil and gas sector look vulnerable from the opposition coming to power, while infrastructure companies, the renewable energy sector and housebuilders are most likely to benefit.

“We only have the bare bones of pledges from the Labour party, and need to see more detailed proposals to fully analyse which sectors could benefit, but there are some broad brush indications that may weigh on or help certain sectors,” says Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown.

The list of winners and losers does not bode well for the likes of the already troubled Thames Water, which has been struggling with rising interest rates on its £18bn of debt and needs a £750m cash injection from its owners.

Indeed, in May its biggest shareholder, the Ontario Municipal Employees Retirement System, wrote off its entire holding in the utility. In accounts led during the middle of the month, the Canadian pension scheme said it would “make a full write-down of its investment and loan receivable with accrued interest”.

This came after another of Thames Water’s biggest investors, the Universities Superannuation Scheme, disclosed that it had written down the value of its stake in the UK’s largest water company by nearly two-thirds. According to financial accounts published at the end of last year, USS’ investment is valued at around £360m, down from almost £1bn a year earlier.

“A tougher stance on water companies that pollute rivers and seas, is likely to weigh further on the utilities sector,” Streeter says.

“Labour plans to give the regulator more power to increase fines and force firms to strip executives of bonuses. Already the cost of repairs to leaky and inefficient infrastructure is a heavy future burden, and with the risk of fines becoming more severe, it’s likely to make the UK water utilities sector even less attractive.”

Darius McDermott, managing director at Chelsea Financial Services, agrees: “Water utilities will face challenges under Labour. The party is unlikely to support substantial water bill increases for customers, and we may see the nationalisation of water companies and an eventual wipeout for equity holders.”

Labour also intends to set up Great British Energy, a publicly owned clean-power firm, with the running costs to be paid through increasing the windfall tax on oil and gas company profits from the North Sea. This would see the current energy profits levy increasing.

However, it is not clear exactly how much would be raised due to the volatility of oil and gas prices.

Streeter says: “A levy specifically on oil and gas in the North Sea is likely to affect smaller companies rather than the larger energy giants, given that they have less capacity to absorb tax changes, and it may lead to fewer contracts being clinched in the supply chain because of this.”

Regarding housebuilders, she adds that Labour’s pledge to kickstart the building of 1.5 million new homes “by shaking up the planning system” and fast-tracking urban brown field sites for development would benefit those who have had to deal with weaker demand in an era of high interest rates and slow approvals of new sites. “However, it remains to be seen just how quickly this streamlining of the planning system will take effect,” she says.

David Gibson-Moore, founder of investment consultancy Gulf Analytica, who was previously a regional chief executive for Robeco, agrees. He says Labour has pledged to support affordable housing and improving public infrastructure, pointing to Barratt Developments and Taylor Wimpey, two of the UK’s largest residential property developers, as well as infrastructure group Balfour Beatty as potential winners from this.

“Following the disastrous Trussonomics mini-Budget from former leader Liz Truss, record inflation and rapidly increasing public debt, Labour is attempting to position itself as a safe pair of hands,” he adds.

And what of the impact on the FTSE100 index of Britain’s big- gest listed companies? Very little should change, investment experts say.

“In terms of the overall impact on the UK equity market from the policy agenda of a Labour government, it is important to understand that the UK stock market is not a simple barometer for the domestic economy,” says Jason Hollands, a former head of corporate a airs at F&C Asset Management where he worked closely with pension funds, who is now a managing director at wealth manager Evelyn Partners.

“The UK equity market is highly international in nature, with around three quarters of FTSE100 earnings derived overseas, and so factors like oil prices, exchange rates, global growth and Federal Reserve policy are more significant factors in driving the direction of the British market than UK fiscal policy.”

McDermott agrees: “For the FTSE100, where the majority of earnings are made overseas, there will be little impact on share prices. The bottom line is the impact of a Labour win will likely be small given the party has gone to great lengths to seduce the City as well as big investors in order to eradicate the memories of former head Jeremy Corbyn’s left-wing leadership.”

Backing Britain?

One thing that has been a concern under the current Tory government is Hunt’s grand plan to get UK pension funds investing in unlisted companies to try and boost Britain’s economic growth.

In the March Budget the chancellor announced a requirement for pension funds to report how much they have allocated to the UK, suggesting he would examine what further action might be taken if this reporting requirement did not lead to an increase in investments.

Many felt the current government was being a little heavy handed in its approach, with Robin Powell, a campaigner for what he calls positive change in global investing and the author of the blog, The Evidence-Based Investor, previously telling portfolio institutional that he believed the government was treating pension funds as a “quick fix for the UK’s ailing economic growth”.

Even the government’s top infrastructure adviser, Sir John Armitt, told attendees at the Trades Union Congress pension conference earlier this year that there is “no reason” a pension fund should be told it must invest in the UK.

However, a Labour victory is unlikely to allay the fears of pension funds, with shadow chancellor Rachel Reeves telling attendees at an event in New York last year that her party aimed to kick-start investment in the UK by speeding up the consolidation of pension funds and allowing capital to flow into smaller private companies through a £50bn future growth fund.

“In the 1990s, pension and insurance funds owned around half the UK equity market, now it is below 10%,” Hollands says. “Both of the main parties recognise the problem. Rachel Reeves has signalled the need for UK financial institutions to be refocused on supporting UK businesses and infrastructure, so we could see measures that will require schemes to have allocations into the UK market or UK assets in areas like infrastructure of green technology.”

This is a theme that Streeter has also witnessed. “Reeves has talked about the importance of encouraging pension funds to invest in high growth UK companies. Again, we are yet to get more detail, and there are concerns within the industry around making sure any reforms work in the best interest of members.”

But, whatever happens, the impact of a Labour government on UK pension funds will remain guesswork until the outcome of the July election is decided and Starmer puts more meat on the bones in terms of his policies.

“Given the rate at which prime ministers and chancellors seem to come and go, investors may be inclined to avoid second- guessing the result of the next general election,” says Russ Mould, investment director of AJ Bell.

“Increasingly vocal and forceful regulators, such as the Financial Conduct Authority, Ofcom, Ofgem, Ofwat and the Competition and Markets Authority, appear to be responding to public pressure for greater action. And perhaps the hardest part for pension fund investors going forward will be spotting which industry or sectors will come under scrutiny next,” he adds.


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