All change at Number 10
Ian Cowie explains what a new PM means for investors
How will investors be affected by our new prime minister, who is expected to enter Downing Street later this month? What opportunities and challenges will Andy Burnham create for investment trust shareholders? The former Greater Manchester mayor is expected to become Labour leader on 17 July and Prime Minister on 20 July, so there is still some time to consider options carefully.
Probably Burnham’s most controversial financial statement to date was when he said Britain “needs to get beyond this thing of being in hock to the bond markets”. But he subsequently emphasised: “I have never said you can just ignore the bond markets” and described himself as “completely committed” to fiscal rules.
“The former Greater Manchester mayor is expected to become Labour leader on 17 July and Prime Minister on 20 July, so there is still some time to consider options carefully.”
In his high profile speech at the People’s History Museum in Manchester on 29 June, he pledged “to fix the economy” and to “rewire Britain”. Burnham has also reiterated Labour’s promise before the last General Election not to raise income tax, National Insurance contributions (NICs) or Value Added Tax (VAT).
However, the current Chancellor of the Exchequer, Rachel Reeves, has already raised employers’ NICs, and income tax revenues have also been increased by freezing personal allowances, or annual income we are allowed to receive before being subject to tax. She recently announced new rules to make savers pay more income tax from next April by restricting the scope to shelter cash in individual savings accounts (ISAs), which are currently tax-free.
Some rumours have suggested NICs might be deducted from investment income. There has also been speculation that Capital Gains Tax (CGT) allowances and rates could be brought into line with income tax. Either change would cause investors to share more of our income and gains with HM Revenue & Customs (HMRC).
Even the identity of the Chancellor in the immediate future is subject to political uncertainty. Westminster chatter suggests Burnham might replace Reeves with Ed Miliband, Secretary of State for Energy; Shabana Mahmood, Home Secretary; Wes Streeting, former Health Secretary; or Yvette Cooper, Foreign Secretary. These are not the only potential candidates.
However, several investment trust fund managers point out that British businesses and shares listed on the London Stock Exchange have survived political uncertainty before; most recently since the vote to leave the European Union on 23 June 2016.
“…several investment trust fund managers point out that British businesses and shares listed on the London Stock Exchange have survived political uncertainty before; most recently since the vote to leave the European Union on 23 June 2016.”
James Henderson of the Lowland Investment Company (stock market ticker: LWI) says Brexit had caused some international investors to shun British shares during the last decade. That has reduced UK share prices in the past and present but increased the potential for growth in future.
Simon Gergel of The Merchants Trust (MRCH) claims UK medium-sized and smaller companies are now “exceptionally cheap”. He adds that political headwinds have not prevented this UK Equity Income fund from increasing dividends annually, without fail, for 44 years and it currently yields 4.6%.
Mark Niznik of Artemis UK Future Leaders (AFL) argues that investor sentiment towards Britain remains “excessively negative”, especially toward medium and smaller companies. He likened these shares to “a coiled spring” and said they are now priced for recovery if the future turns out to “slightly less bad than expected”.
“Mark Niznik of Artemis UK Future Leaders (AFL) argues that investor sentiment towards Britain remains “excessively negative”, especially toward medium and smaller companies.”
British businesses might also benefit if the new Labour government puts proposals into effect to give local authorities greater powers to invest via the £27.8 billion newish National Wealth Fund. However, doubts remain about politicians’ ability to pick winners with other people’s money.
Individual investors who are keen to preserve the real value or purchasing power of our own money would do well to remember that investment trusts bring the world within reach. British shares might be cheap but could get cheaper and investing internationally is a simple way to diminish risk by diversification.
Investment trusts make it convenient and cost-effective to spread our money over many different companies, countries and currencies. This should reduce the risk of them all going down at once and give us exposure to capital growth and income, wherever they arise.
Turning from assets to wrappers, the possibility of higher taxes on saving and investment means we should consider making full use of ISA and pension allowances sooner rather than later. Most of these allowances are already annual, and there is limited scope to utilise earlier years’ unused allowances, so it really is a case of use them or lose them. Looking forward, it is unlikely that any ISA or pension reforms announced in future will affect money already placed inside these tax shelters.
Political drama may dominate news headlines in the short term but economic facts will probably prove more important for investors in the long term. Burnham’s bark could be worse than his bite and, perhaps a decade hence, his premiership might be seen in a similar historical perspective to the Brexit vote. Opinions remain divided but business tends to go on as usual.
