The pessimistic narrative surrounding the UK is in desperate need of a rewrite and a new government could be the catalyst needed for change, according to William Tamworth, co-manager of the Artemis UK Smaller Companies fund.
It has become seen as a basket case to domestic and international investors alike, with UK equities losing £22bn ($28.2bn) over the last three years following 36 consecutive months of outflows, according to Calastone data. A shift in narrative is essential to stem these losses, and a new government could signify a fresh start, according to UK equity fund managers.
Tamworth says: “It’s not been seen as a stable place to invest. If you listen to the likes of Rachel Reeves, her message is about stability, and that’s what we haven’t had over the last few years.
“If you’re at an extreme point, things don’t need to go really well, they just need to stop getting worse.”
Tamworth points to certain goals outlined in the Labour Party’s manifesto that are unlikely to take place for some time, yet have markets excited. For instance, its pledge to replace higher business rates on retail stores with a fairer system that will level the playing field between high streets and online sellers, who are currently charged less.
“This makes complete sense and they should reform it, but it has also appeared in the last five Conservative manifestos. Therefore, you need to read the manifestos with an enormous pinch of salt,” he explains. “I take some comfort from the fact that the Labour Party recognises the value of financial services and it is trying to support it – and you don’t need big changes to drive a change in narrative. Even little things could make quite big differences.”
Minor policies could have big consequences
As millions of pounds continue to flow out of UK equities, investors are eager for remedies to be sought more hastily. Many solutions have been circulating over the past couple of years – the British ISA, removing Stamp Duty on UK stocks, forcing pensions funds to invest in their home market – but none have been implemented.
However, Tamworth says all these plans will have an insignificant effect on the UK equity market. But the perception of change – even when little is actually happening – could convince investors to buy back in.
“At the edges, we then need to make sure we are doing everything we can to make the UK as attractive as possible, but that’s a secondary tailwind,” he explains. “Many of Reeves’ proposals are sensible, but they’re not going to make a huge difference in the short term. It takes time for these things to come through, but sentiment can change instantly.”
This sentiment was echoed by Ninety One UK Smaller Companies manager Matt Evans, who says these policies are likely to have a minor material impact, but could become considerable drivers in the story around UK equities.
“It might just generate a few billion pounds of extra money, but in a world where outflows have been suffered, any additional inflow is quite positive,” he says. “It is a narrative where investors think there might be more flows, which often stimulates more flows, so it becomes quite self-fulfilling.”
The starting bar is low
“How much worse can things get? It’s been really tough, so we’re starting from a fairly low base,” Evans explains. “At the stage we’re at now with inflation and interest rates, there’s a chance to really set things up differently. It’s a real chance to be glass half full. We can start really creating a more positive, optimistic environment and narrative.”
Tamworth also aired his frustrations on inflated cynicism, stating: “We’re brilliant as a country at talking down our strengths. We always love berating things that are successful.
“But the UK economy is nowhere near as bad as people feared it is, and it’s easier to build a new conversation around it if there’s also a change in government.”
It’s no wonder that the UK has been burdened with such a reputation given the turbulence of the past few years – namely former prime minster Liz Truss’ Mini Budget during her short stint as premier. It sent the UK markets into disarray, but this single event has set a tone of fiscal probity that could last many years to come, according to Evans.
He says: “I don’t see why [policies addressing UK outflows] wouldn’t be a good thing to accelerate, but it should be done in the right way. I think [Truss’s Mini Budget] will hopefully remain in memory long enough to know the damage that can be caused, and serve as a reminder to implement policies you fully understand and know how they will be perceived by markets.
“It is a critical part of government to have well-structured policies that remove the element of worry or shock that might seep into the system. So I don’t think it’s a bad thing, but equally it shouldn’t hamstring any kind of decision-making.”
Equally, the UK’s move towards stability differs from that of some major economies. With the far right gaining influence in countries such as France, the UK has gone from being a volatile spot in Europe to a voice of reason, according to some managers. And the polarised election campaign in the US could further improve the narrative for the UK on the global stage.
Evans adds: “Everyone has a comment on how the UK looks challenged and uninventable, but we have some really good businesses that operate on a global basis, and that’s always been the case. So without any shadow of a doubt, as things become more complex elsewhere, people will look at the UK and it will look in a better position.”
‘It can all be undone pretty quickly’
A change in the UK’s narrative has investors excited, but this momentum could easily be derailed. Close Brother Asset Management’s investment officer Isabel Albarran said earlier this week that a strong Labour majority would be positive for markets as it would allow the party to implement its policies unimpeded. However, Evans warns this benefit could also be its downfall.
“Majorities are good because things can get done, but they can also be bad if you feel that there’s no risk because you’re in power and can just do what you want. [Labour’s] plan needs to hold up to scrutiny and stay within the realms of what it has suggested.”
Questions remain as to how Labour plans to finance some of its goals. It has pledged not to interfere with Income Tax, National Insurance, VAT, and Corporation Tax, but the £7bn it expects to raise by tackling tax avoidance, closing non-domiciled and carried interest loop-holes, and putting VAT on private schools, may not be enough. Labour could be spending £25bn a year on building up the UK’s renewable infrastructure, and would be dishing out an additional £1.7bn per annum on establishing publicly-owned energy provider GB Energy.
Nevertheless, Evans is maintaining his ‘glass half full’ approach, noting that markets will have to wait and see for a more detailed plan once Labour has settled in office. “I can imagine it is difficult to have a plan fully costed until there is full visibility and foresight on what those things might look like,” he says. “To have a policy and direction of travel is good, but the reality of how you can actually implement it and the costs is needed to build confidence.
“Everyone likes well signposted plans, so laying that out clearly and nailing down timeframes will be really critical. It’s that roadmap that would be the most supportive for long term benefits to capital markets.”
Ultimately, whatever direction the new government takes will need to produce results. A change is narrative is essential, but that alone is not enough to convince investors – they are looking for palpable effects, according to RSMR CEO Ken Rayner.
“There are still some diehards who think the UK will come back, and arguably we have a lot of valuation discrepancies between the UK and other global markets which could be made up at some point, but there would have to be really strong reason for that to happen,” he explains. “It’s very much orientated around commodities and energy, whereas the world is all about technology, so it’s very difficult to see that coming back.
“I don’t think [policies addressing UK outflows] is enough. At the end of the day, people want returns, and if they don’t think the UK is going to deliver those, then I don’t see it making a huge amount of difference.
“I think a new government would probably be a fresh start – that might be an impetus for change. People are looking for change and maybe that will stoke some optimism. Whatever your affiliation, I think people are looking for change, whatever form that takes.”
This article first appeared in our sister publication, Portfolio Adviser.
