Post-Election Commentary

Before commenting on the implications of the UK’s election, let me first urge caution in attaching too much significance to it. We are fortunate that in the UK, the two main parties are close enough to the centre that the implications of a change in government are relatively minimal. Admittedly, the recent past has seen frequent changes at the top of government, and some of these have had significant impacts on the prices of key financial assets – the ambitious short-lived Truss-Kwarteng project (which has ultimately cost the former her seat, while the latter decided not to stand) being a prime example. However, historically there has been no discernible relationship between the longer-term performance of the UK’s financial assets and whether we are governed by left- or right-leaning politicians.

Labour have won a convincing majority. This was widely predicted (betting markets implied the odds of a Labour majority were above 95% for weeks beforehand) and as such there has been no immediate major moves in financial markets. As this goes to press, the main UK indices are all up slightly. Within that, and in an encouraging sign, the discount to net asset value has narrowed at several infrastructure and small cap investment trusts.

The extent of the majority, which is arguably accentuated by the significant infighting within the Conservative Party, may give some investors cause for concern. Will the left of the Labour Party look to seize this opportunity to pursue a more radical legislative agenda safe in the knowledge there are not enough opposition MPs to vote against them? Checks and balances are a healthy part of a democracy, and that includes a House of Commons that at least has some form of opposition.

However, after the confetti has been cleared from the floor of Labour HQ, senior party members will know that this electoral success was largely the result of the Conservatives’ implosion. Labour’s overall share of the vote was actually little changed from 2019. In contrast, Reform UK, the Lib Dems and the Green Party all enjoyed stronger results than had previously been expected, and together accounted for a third of the national vote. This home truth should not be overlooked by Westminster’s new policymakers.

In any case, Labour could not have been clearer about its priorities in the run up to the election, and it would be very surprising to see it move away from a platform based on growing the economy. In both the manifesto and an earlier document outlining its plan for financial services (“Financing Growth”), Labour have been clear that it must harness the UK’s deep and well-established capital markets to help boost economic growth. Indeed, when it comes to economic policy, Labour and the Conservatives have long been very close. With the burden of tax already being high, and with the Treasury being highly indebted, it is arguable that politicians have no choice but to look to stimulate economic growth to grow the tax take and reduce the debt burden, rather than increase taxes.

For investors in UK assets, there is considerable cause for optimism. In “Financing Growth” Labour explicitly stated the equity market is undervalued:

“The UK’s capital markets are key to driving innovation and investment in the economy. However, despite having one of the deepest savings pools and the most developed capital markets in the world, there has been a sustained reduction in investment in UK markets, including a reduction in the capital available to British businesses seeking to scale-up. This has resulted in undervalued stocks and a lack of liquidity which has driven some companies to de-list from London and many newer companies to list abroad.”

In their manifesto, there was even an explicit promise to look to increase pension fund investment into the UK:

“Labour will also act to increase investment from pension funds in UK markets. We will adopt reforms to ensure that workplace pension schemes take advantage of consolidation and scale, to deliver better returns for UK savers and greater productive investment for UK PLC. We will also undertake a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK markets.”

UK pension funds, whose savers enjoy tax breaks, have long been reducing exposure to UK assets to pitiful levels, in stark contrast to pension funds in other developed markets which routinely invest significant portions in their home market. Some trustees will understandably rail against any attempt to force them to invest in any one market, but we agree that the UK equity market is extremely undervalued. This is exactly the kind of development that could reverse the dramatic underperformance of the UK stock market – especially compared to that of the US.

On the other hand, while Labour has pledged not to raise any of the main taxes, they have been noticeably silent on Capital Gains Tax, and schemes such as Business Property Relief, which investors in the AIM market benefit from.

In other areas of policy, such as a commitment to “clean power by 2030”, Labour has committed to work with the private sector to double onshore wind, triple solar power, and quadruple offshore wind by 2030. This is a prime example of the need to work with business and harness the pool of UK private sector savings. Labour must maintain attractive rates of return on investment in these areas.

In summary, we are hesitant to draw any conclusions that are too strong. We look forward to seeing whether Labour can help reverse the flow of capital away from the UK’s capital markets. Their policies with regard to pension fund investment in UK assets are well worth watching.

Ben Conway – Chief Investment Officer

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS.

This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The information and opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested.