The UK stock market may have begun the year in fine form, but it has done so after a disappointing year. While this might well be mainly down to international concerns – the likewise disappointing performances of other major world markets in 2018 suggest this is the case – deep uncertainty about Britain’s future relationship with the EU will not have helped.
While the year ahead is expected to bring with it more clarity on this divisive issue, it could also take away the related benefits should the outlook for the domestic political landscape become less clear. Already with one no-confidence motion in parliament behind it and the Labour Party hoping to table others, we perhaps ought not to rule out the possibility of eventual opposition success and an early general election.
A general election would have to be preceded by another Labour manifesto, however, a number of consistent themes have already emerged that serve as a guide to intent and which would have a material bearing on business.
This, if anything, understates the case from the point of view of utilities, outsourced healthcare services companies with NHS contracts and rail operators. Renationalisation may be difficult and expensive to put into practice – although this is disputed – but it undoubtedly could be done with enough political will.
Banks could be impacted by a financial transactions tax and the introduction of a new competitor in the shape of a £250 billion National Investment Bank¹. Meanwhile, it’s doubtful the UK’s big defence contractors would be able to depend on government orders continuing at present levels.
Global technology and social media companies might also find it more expensive operating in the UK in future, with a windfall tax to pay for public interest journalism one idea being touted².
Possible beneficiaries of a Labour government might include companies positioned to deliver on policies of creating more affordable housing, and greater levels of social care – where, by common consent, there is a deficit in provision.
On taxes, the rhetoric from Labour is clearly redistributive, but not overtly adventurous. Taken together, Labour’s plans could have quite a sting in the tail for some companies – higher corporation tax and a further rise in the minimum wage to £10 per hour by 2020, for example³.
However, even though Labour headlines its mission as being “for the many, not the few”, proposals to raise income tax for individuals earning more than £80,000 per annum – the highest earning 2% of adults – could hardly be described as radical.⁴
Neither, it could be argued, are Labour’s proposals to reverse the corporation tax cuts of the Conservatives. Corporation tax stood at 30% in 2008 compared with 19% today, and Labour has said it would raise it to 26% for larger businesses and 21% for smaller ones⁵.
Increasing disposable incomes and raising living standards through more spending on public services could also prove beneficial in the end – to the same types of company that initially bore the brunt of tax increases, and the economy as a whole – provided, that is, if inflation stayed grounded and sterling at reasonable levels.
The IFS concludes Labour’s manifesto in 2017 detailed commitments to increase public spending by around £70 billion per annum⁶.
More contentious perhaps is Labour’s view that 10% of the shares of a company with more than 250 employees should be hived off, with the dividends from them being split between workers and the government⁷.
One way of looking at this is that a company with more than 250 employees would have to grow faster to offset the earnings hit and smaller companies with a couple of hundred or so employees might feel reluctant to add to their workforces.
Advocates of the plan would point out a fairer distribution of profits and the likelihood employees would feel more connected to and engaged in their companies, yielding benefits for all concerned.
In 1997 – the last time Labour came to power after an extended period out of office – concerns from a markets perspective ultimately proved unwarranted. Indeed, worries holding back equities prior to the 1997 general election may have left more room for the positive returns investors went on to enjoy over the next few years⁸.
This time though the political hue of a Labour government would likely be somewhat different, suggesting 1997 sets a weak precedent, albeit that the adverse surprise of an election this year could well end up pushing equities to a lower starting point.
However, a change in government might prove more manageable for companies whose DNA enables them to adapt and prosper in a changing political landscape. Just as changes in technology threaten incumbents but open up new possibilities to innovators, so moderate changes in taxation and public spending could stand to do the same.
Meanwhile, Labour’s ultimate contribution to the Brexit withdrawal agreement has also yet to fully play out. If that contribution turns out to be one that tips the balance towards a free trade deal with the EU – and that appears to be the current direction of travel in Labour – then there are many UK companies that would welcome that.
So we may be largely where we were at the outset here – with a mixed picture of challenges and possibilities, each with no more than a degree of certainty attached. Just as businesses say their biggest difficulty with Brexit is dealing with the uncertainties involved, so UK investors could conceivably be asked to weigh a similar bag of uncertainties from a political perspective as the year progresses.
Having said that, there is one thing we can be sure about – the current price for investing in UK equities today is already low on international comparisons, suggesting markets are far from discounting positive outcomes for British businesses over the year ahead⁹. That’s even after accounting for the fact that the UK’s top-100 listed companies earn around three quarters of their revenues abroad¹⁰.
That, as much as anything else, might explain the strong start to the year shares in some domestically oriented UK companies have had, underlining the difficulty of trying to time investments in the UK – or anywhere else for that matter – purely on the basis of future challenges we think may arise.
The Lindsell Train fund’s growth and quality bias no doubt goes a long way to explaining the complete lack of utilities in the portfolio, but large holdings in global beverages companies (Diageo, Heineken) food multinationals like Mondelez and the global luxury fashion brand Burberry¹⁰.
The Fidelity Enhanced Income Fund places more store on companies that pay strong dividends and have a track record of growing their dividends year after year. Safety of income at a reasonable price sums up the approach. The Fund’s top-10 holdings comprise UK dividend giants largely with a global reach, including GlaxoSmithKline, HSBC, BP and Shell. This fund also uses derivative instruments to generate additional investment income.
¹ Morning Star, 15.09.18
² BBC News, 23.08.18
³ Labour manifesto 2017
⁴ IFS, 16.05.17
⁵ Chartered Institute of Taxation, 28.09.18, and HM Revenue & Customs, 29.05.15
⁶ IFS, 01.10.18
⁷ FT, 24.09.18
⁸ London Stock Exchange, January 2019-02-05
⁹ MSCI, 31.01.19
¹⁰ FTSE Russell, May 2017
¹¹ Lindsell Train, 31.01.19
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