The FTSE 100 is hitting record highs. A constant stream of bids is pushing up share prices. There are even one or two new flotations, and of course we are about to elect a new government, with a huge mandate, committed to “stability” and “investment”.
Surely investors should be rejoicing at the prospect, rushing to put money into UK companies.
Not exactly.
As the general election looms, and the result seems more and more certain, investors are getting out of British equities. With rising taxes and more regulations, the UK is set to be a less profitable place to do business – and people are already pulling their money out.
After two decades of dismal under-performance, the UK equity market has finally been doing slightly better. The FTSE 100 index has been hitting all-time highs, and although it is still way behind the US and even German indexes, that is an improvement.
Indeed, according to an analysis by Bloomberg, over the last three months both the FTSE 100 and the more broadly-based FTSE 250 have outperformed the S&P 500, France’s CAC 40, Germany’s DAX, and Japan’s Topix index. A few major bids, such as the £34bn offer for Anglo American from its rival mining giant BHP, plus better performance from some of the big oil and pharma companies, have helped to finally juice up performance.
When a market starts to rise, you would normally expect money to start pouring in. Everyone wants to ride the trend. And yet, right now it is still leaving UK equities as fast as it can. According to figures from the Investment Management Association, retail investors pulled £1.3bn net from British funds in April, the latest month for which figures are available. The worst-selling sector was “UK All Companies”, with net outflows of almost £1bn.
British investors had money to put to work, with net investment of £2.8bn for the month, but they decided the UK was not the best place for it. Investors from the rest of the world are delivering a similar verdict. According to the global fund network Calastone, there was a £1.1bn outflow from UK-focused funds in May, the worst month for net selling since June 2022, and the second worst ever month since the firm started tracking the figures.
Sure, there may be plenty of explanations for that. Interest rates are coming down in Europe, and that may lead to better returns on the other side of the Channel. The American tech stocks are still on a tear, and that makes returns a lot more attractive, while the giant Japanese stock exchange has finally recovered from a 35-year bear market.
But the important point is this. It is hardly a vote of confidence in the Labour administration that will, almost certainly, be formed at the start of next month, or the commitment to “growth” that is its central pledge.
In reality, it is not hard to understand why. Over the last few days, leaks have started to emerge that the shadow chancellor Rachel Reeves will raise capital gains tax, perhaps even equalising it with income tax. For higher-rate taxpayers that would mean doubling the rate, from the current 20pc to at least 40pc, and 45pc for people on the top rate.
We already know that there are extra windfall taxes on the way, especially on the already battered firms still developing oil and gas in the North Sea. But there may well be extra “windfall” levies, with the banks next in line (perhaps by reducing the interest the Bank of England pays on deposits they have to hold with it, with the profits returned to the Treasury).
Indeed, it seems as if Labour already thinks that any company that by some miracle does well is reaping a “windfall” and is a legitimate target for an extra levy. We will surely see extra taxes on the private equity firms, with profits redesignated as income instead of capital gains, and taxed at a far higher rate.
And of course we may see tweaks to corporation tax, with the generous reliefs that Rishi Sunak put in place to compensate, at least marginally, for the increase from 19pc to 25pc, limited again.
It does not stop there. While we are still waiting for the final version of the party’s manifesto, it is certain to include a huge extension of employment rights. Full legal protection is likely to be offered to workers from the first moment they start, zero hours contracts will be limited even if they escape an outright ban, and versions of trendy “wellness” fads such a “right to switch off” could be enshrined in law, empowering woke human resources overlords to increase their power even further.
The UK’s flexible labour market, one of our key advantages over our rivals since the 1980s, will finally be brought to an end.
Meanwhile, the pension funds that might have started investing in British equities again could be corralled into “green infrastructure” instead, regardless of whether it can make any profit, draining cash out of the stock market.
Add it all up, and one point is clear: the UK will be a far harder place to make money over the next five years. Labour talks about “growth” as if nobody ever thought of it before, but every single concrete policy it proposes is likely to slow the economy down even more.
The blunt truth is this: the UK faces five years of stagnation, trapped in a doom-loop of zero growth, rising taxes, and creaking public services. The returns will be dismal.
The actual election won’t be for another four weeks. But investors have already voted with their wallets, and delivered a damning verdict. They are getting out of Labour’s landslide Britain – and it is very hard to blame them.
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