Episode 2 - Immediate market reaction

00:00:06:01 - 00:00:08:09
Hello and welcome to our

00:00:08:09 - 00:00:12:08
second episode of the first 100 days in office podcast series.

00:00:13:00 - 00:00:16:18
We will delve into the newly elected Labour Party's policies,

00:00:17:03 - 00:00:21:04
and how this could impact sectors, businesses and individuals.

00:00:21:16 - 00:00:25:18
I'm George Lagarias, I'm the Chief Economist at Forvis Mazars UK.

00:00:26:01 - 00:00:30:03
And today I'm joined by James Robinson, Senior Financial Planner.

00:00:30:20 - 00:00:34:18
Together we're going to look at how markets have reacted, following,

00:00:35:03 - 00:00:38:09
the Conservatives record breaking defeat to, to Labour.

00:00:39:05 - 00:00:42:18
And any planning you can do to prepare for,

00:00:43:04 - 00:00:45:18
the proposed policy changes.

00:00:45:18 - 00:00:48:14
Now, as we start,

00:00:48:14 - 00:00:52:03
let's look at, how markets have been

00:00:52:23 - 00:00:55:11
reacting to all that

00:00:55:11 - 00:00:59:13
and unsurprisingly, the markets haven't reacted

00:00:59:13 - 00:01:02:21
much, the reaction, in fact, has been muted. Why?

00:01:02:21 - 00:01:05:14
Because most of this has been predicted.

00:01:05:14 - 00:01:09:13
It is rare that one can predict such a landslide victory. But,

00:01:10:22 - 00:01:11:11
every

00:01:11:11 - 00:01:14:11
poll suggested that this would be the natural outcome.

00:01:14:11 - 00:01:18:20
Even a small Labour victory in this particular case would have been,

00:01:19:06 - 00:01:22:00
a surprise.

00:01:22:00 - 00:01:24:11
So, we have,

00:01:24:11 - 00:01:28:13
a significant majority from Labour, something north of,

00:01:29:02 - 00:01:32:02
200 seats at the time of recording.

00:01:33:11 - 00:01:36:08
Conservatives did survive as the opposition party

00:01:36:08 - 00:01:40:01
and the Liberal Democrats actually picked up a significant number of votes,

00:01:40:11 - 00:01:44:19
especially in Tory strongholds, the so-called, Blue Wall.

00:01:46:06 - 00:01:50:06
Now, the FTSE 100 was up,

00:01:50:13 - 00:01:53:13
maybe 1%, and,

00:01:54:04 - 00:01:56:13
but the bond market hasn't really moved

00:01:56:13 - 00:02:01:02
because the question for markets was never who's going to win this election?

00:02:01:15 - 00:02:01:20
Okay.

00:02:01:20 - 00:02:04:18
This was, by and large, a foregone conclusion.

00:02:04:18 - 00:02:09:22
The issue for markets was the one that was completely avoided,

00:02:10:15 - 00:02:14:11
during the election period, the relations with the EU.

00:02:14:18 - 00:02:17:18
It's understandable that Labour didn't want to touch upon it,

00:02:17:21 - 00:02:20:21
because it didn't want to jeopardize its large margin.

00:02:21:08 - 00:02:23:07
It's understandable that,

00:02:25:06 - 00:02:27:02
the, Conservative

00:02:27:02 - 00:02:31:14
Party didn't want to touch upon it, because, they were haemorrhaging

00:02:31:14 - 00:02:35:17
votes to Reform, which is primarily a Brexit

00:02:35:17 - 00:02:38:17
party. So,

00:02:38:17 - 00:02:40:16
it was an issue that was very important

00:02:40:16 - 00:02:44:20
but completely avoided, in the, in the, in the pre-election period.

00:02:45:15 - 00:02:45:23
Ok.

00:02:45:23 - 00:02:48:22
But now markets want some clarity.

00:02:49:15 - 00:02:51:17
Following 2020, economic performance

00:02:51:17 - 00:02:54:17
has been generally lacklustre, inflation persistent.

00:02:55:00 - 00:02:58:02
And the London Stock Exchange has not been at the top of

00:02:58:02 - 00:03:01:02
of businesses preferences for listing.

00:03:01:11 - 00:03:02:18
Okay.

00:03:02:18 - 00:03:05:19
So the question is: what now?

00:03:07:12 - 00:03:10:02
What markets silently

00:03:10:02 - 00:03:14:21
have been waiting for is some sort of nod from a British government

00:03:14:21 - 00:03:19:04
that they are, happy to move closer towards Europe?

00:03:19:04 - 00:03:20:15
That doesn't mean I'm doing Brexit.

00:03:20:15 - 00:03:22:18
Of course, it does not mean,

00:03:22:18 - 00:03:26:20
you know, signing treaties, you treaties or new trade deals necessarily.

00:03:27:02 - 00:03:31:02
But it does mean two things which are easy to deliver.

00:03:31:12 - 00:03:34:23
First, having just better relations with neighbours

00:03:35:07 - 00:03:39:20
can go a long way in reducing trade friction. and,

00:03:40:23 - 00:03:42:14
and delays,

00:03:42:14 - 00:03:45:14
and all the issues that are causing real economic harm.

00:03:46:08 - 00:03:49:16
So, for example, there is a trade deal in effect

00:03:49:16 - 00:03:52:16
for goods, but, in practice,

00:03:53:08 - 00:03:55:07
the movement of goods has been somewhat

00:03:55:07 - 00:03:58:07
cumbersome between the EU and the UK.

00:03:58:11 - 00:04:01:00
So there are points of improvement on that.

00:04:01:00 - 00:04:03:13
And those points of improvement can be achieved

00:04:03:13 - 00:04:06:18
if there are good relations to begin which that to begin with.

00:04:06:18 - 00:04:09:18
That's why we have diplomacy,

00:04:10:05 - 00:04:13:06
which has usually positive connotation.

00:04:13:06 - 00:04:16:14
It is there to, to smooth out the differences between

00:04:16:14 - 00:04:18:18
the heads of state.

00:04:18:18 - 00:04:21:21
And of course, there is also

00:04:21:21 - 00:04:25:20
the framework in the exchange and the trade of services,

00:04:25:20 - 00:04:30:10
especially financial services, which has yet to take a final shape.

00:04:30:10 - 00:04:34:17
And again, one needs good relations to, to achieve that.

00:04:35:02 - 00:04:40:05
So, a more a government that's more positive towards Europe

00:04:40:16 - 00:04:44:12
could conceivably achieve better economic outcomes

00:04:44:20 - 00:04:48:06
just by pursuing a more amicable diplomatic route.

00:04:48:19 - 00:04:51:15
And that is at least what markets are thinking.

00:04:53:00 - 00:04:55:17
There is a caveat here, of course,

00:04:55:17 - 00:04:58:16
the French just had their election

00:04:58:16 - 00:05:01:21
and they are possibly,

00:05:02:14 - 00:05:05:17
the second round hasn't happened yet,

00:05:05:17 - 00:05:08:17
but we're possibly very close to more nationalistic government.

00:05:09:00 - 00:05:12:12
So diplomatic exchanges might still be difficult.

00:05:14:16 - 00:05:17:14
The other thing that, markets are looking for

00:05:17:14 - 00:05:21:16
in the UK, some more clarity around growth because

00:05:21:16 - 00:05:24:00
Mr Starmer, again, didn't want to alienate voters,

00:05:24:00 - 00:05:26:18
He pursued,

00:05:26:18 - 00:05:29:11
a more general view of growth.

00:05:29:11 - 00:05:32:15
But, as our Chief Investment Officer,

00:05:32:15 - 00:05:35:15
Ben Seager Scott says, hope is not a strategy.

00:05:35:23 - 00:05:37:13
Where is growth going to come from?

00:05:37:13 - 00:05:40:11
That to GDP is at 108%.

00:05:40:11 - 00:05:43:23
The deficit is running north of 4% at 4.5%.

00:05:44:03 - 00:05:45:23
So fiscal space is very limited.

00:05:45:23 - 00:05:47:21
One can try to breach it.

00:05:47:21 - 00:05:52:09
But, the woeful tale of Liz Truss, stance is,

00:05:53:08 - 00:05:56:05
you know, as a warning for future leaders.

00:05:57:06 - 00:05:59:14
Otherwise one can increase taxes.

00:05:59:14 - 00:06:04:15
Yet Labour has said often that they don't plan major tax increases.

00:06:05:14 - 00:06:08:06
So where is the growth going to come from?

00:06:08:06 - 00:06:11:09
So apart from relations with the EU,

00:06:12:08 - 00:06:16:08
the other issue is where is growth going to, to come from?

00:06:16:19 - 00:06:20:00
And for markets, I suppose,

00:06:20:00 - 00:06:23:00
again, the election wasn't the

00:06:23:01 - 00:06:26:12
wasn't, the catalyst they were waiting for.

00:06:27:09 - 00:06:28:16
they had pretty much priced in.

00:06:28:16 - 00:06:29:13
What's going to happen?

00:06:29:13 - 00:06:32:00
The question was going forward. Okay.

00:06:32:00 - 00:06:34:16
So what does Labour bring to the table?

00:06:34:16 - 00:06:37:01
And we will learn this in the next few days.

00:06:37:01 - 00:06:41:16
And I would guess this is where we will gauge the market reactions,

00:06:42:19 - 00:06:45:19
to, Labour’s victory.

00:06:46:02 - 00:06:48:19
Now, James, I know that some votes are still being

00:06:48:19 - 00:06:51:22
counted, but, you know, it's a foregone conclusion

00:06:51:22 - 00:06:54:15
that we will have a Labour government.

00:06:54:15 - 00:06:58:21
When we look at what Labour has proposed in their manifesto,

00:06:59:12 - 00:07:02:02
and some of the rumours we've seen in the press,

00:07:02:02 - 00:07:05:12
what should people consider when looking at their financial

00:07:05:12 - 00:07:08:16
and business planning ahead of any proposed policy changes?

00:07:09:16 - 00:07:11:19
Thanks George. I think the

00:07:11:19 - 00:07:14:19
the starting point, even before coming on to

00:07:14:19 - 00:07:19:07
what is it specifically Labour's set out, their plan to do is to take a step back

00:07:19:07 - 00:07:22:10
and just think about what it is people should be doing as part of good

00:07:22:10 - 00:07:23:02
planning anyway.

00:07:23:02 - 00:07:26:20
And the starting point is that you should always build a long term

00:07:26:20 - 00:07:29:20
financial plan, primarily based on your objectives

00:07:30:00 - 00:07:33:14
and of trying to avoid knee jerk or preemptive planning as it's

00:07:33:22 - 00:07:38:00
naturally part or impossible to accurately predict

00:07:38:01 - 00:07:39:18
what legislation is going to be introduced

00:07:39:18 - 00:07:41:18
and how that's actually going to be affected,

00:07:41:18 - 00:07:43:05
because that could change how it is.

00:07:43:05 - 00:07:45:10
You might want to plan around it.

00:07:45:10 - 00:07:48:01
That being said, where there's planning objectives

00:07:48:01 - 00:07:51:08
that have the potential to be impacted by future

00:07:51:08 - 00:07:54:08
legislative change, that would be remiss not just consider this

00:07:54:17 - 00:07:59:06
and that if there's perceived little downside to planning around that,

00:07:59:06 - 00:08:02:22
then it's worth considering taking some actions,

00:08:02:22 - 00:08:05:22
possibly sooner rather than later in some areas.

00:08:06:07 - 00:08:09:00
So in this regard, we're having conversations with clients

00:08:09:00 - 00:08:12:00
about potentially advancing some gifts that they might be making,

00:08:12:15 - 00:08:13:23
or been planning to make.

00:08:13:23 - 00:08:16:15
And even thinking about potentially advancing

00:08:16:15 - 00:08:19:15
the realisation of some capital gains as well.

00:08:20:00 - 00:08:22:11
And there's also some,

00:08:22:11 - 00:08:25:16
some action need around reviewing what it is people would like to do around

00:08:25:16 - 00:08:28:18
their pension planning and how it is they want to be to

00:08:28:18 - 00:08:30:00
be accessing those benefits.

00:08:31:07 - 00:08:34:06
The first

00:08:34:06 - 00:08:37:13
major change or most significant change we can see coming

00:08:37:13 - 00:08:40:14
is that Labour have made it very clear that they're going

00:08:40:14 - 00:08:45:07
to be reviewing the non domicile rules in a bid to close, tax loopholes.

00:08:45:23 - 00:08:49:11
so the proposals set out in March lack some detail.

00:08:49:11 - 00:08:51:11
So executing planning around that is difficult.

00:08:51:11 - 00:08:54:22
So the actions that were once there still remain the same.

00:08:55:08 - 00:08:59:12
But if you are a non domicile resident living in the UK,

00:08:59:17 - 00:09:01:21
you should consider reviewing your existing strategy

00:09:01:21 - 00:09:04:21
and how it meets your current and future objectives

00:09:05:06 - 00:09:06:07
so that you can be ready

00:09:06:07 - 00:09:09:13
to execute any other changes needed when there's more clarity,

00:09:10:01 - 00:09:13:14
given by the current government and that, then you can be in a position

00:09:13:14 - 00:09:14:17
where you come for taking action.

00:09:14:17 - 00:09:16:01
So the first thing is that

00:09:16:01 - 00:09:18:20
if you're non domiciled resident in the UK, that you should at least be

00:09:18:20 - 00:09:21:21
reviewing your plans, getting ready to make changes if it's needed.

00:09:23:10 - 00:09:24:19
The second

00:09:24:19 - 00:09:29:15
major change, that looks like it's coming is that Labour also set out

00:09:29:15 - 00:09:34:05
they're looking to reintroduce VAT to be applied on private school fees.

00:09:34:08 - 00:09:37:19
in addition to ending the business rates relief exemption for

00:09:38:00 - 00:09:43:11
for private schools as well, we don't yet know exactly how this 20% VAT charge

00:09:43:11 - 00:09:46:11
is going to be passed on to those attending private schools.

00:09:46:12 - 00:09:49:22
But when they're announced planning for private school for individuals

00:09:49:22 - 00:09:51:05
can be very important.

00:09:51:05 - 00:09:55:19
And that at this current time, those paying for private education,

00:09:55:19 - 00:09:59:12
for their children or for family members or whoever it might be

00:09:59:17 - 00:10:03:08
should be thinking about what am I going to do if there is a 20%

00:10:03:08 - 00:10:07:19
increase in the cost of, providing these fees, and seeing how

00:10:07:19 - 00:10:11:19
that might impact their budgets and seeing what stretch they have where available.

00:10:14:01 - 00:10:18:07
thirdly, that Labour also reportedly

00:10:18:07 - 00:10:21:10
considering a review of the business property relief regime.

00:10:22:19 - 00:10:26:04
as a reminder, business property relief is where if you hold a business

00:10:26:04 - 00:10:30:04
asset that that should be able to qualify for relief from inheritance tax.

00:10:30:04 - 00:10:33:04
So you could have a zero rate of tax applied.

00:10:33:10 - 00:10:37:02
if this is reviewed, this could significantly impact

00:10:37:02 - 00:10:40:16
the family owned and mid-market businesses across the UK.

00:10:41:06 - 00:10:44:06
it was a relief at first, introduced over 50 years ago

00:10:44:13 - 00:10:48:15
and it's been a really valuable way for, for individuals, to pass businesses

00:10:48:15 - 00:10:50:15
down, tax efficiently through the generations

00:10:50:15 - 00:10:53:02
to ensure the continuity of business operations.

00:10:53:02 - 00:10:57:07
The idea when it was introduced was inheritance tax doesn't force

00:10:57:07 - 00:11:00:07
the sale of a business, and therefore it can carry on,

00:11:01:05 - 00:11:04:09
but it is also something that can therefore create a,

00:11:05:12 - 00:11:08:06
a large inheritance tax saving for those families

00:11:08:06 - 00:11:12:10
with large levels of wealth in privately owned businesses,

00:11:13:11 - 00:11:17:17
in particular, that's when the Office of Tax Implication reviewed it.

00:11:18:06 - 00:11:23:08
a few years ago, they said that, they should be considering

00:11:23:08 - 00:11:26:22
whether you get both capital gains tax and IHT relief at the same time.

00:11:26:22 - 00:11:29:22
So it's something worth keeping in mind if this is something that you'd be looking

00:11:29:22 - 00:11:31:10
to take advantage of.

00:11:31:10 - 00:11:33:05
So with family business,

00:11:33:05 - 00:11:36:02
family owned business has been, well, the largest contributor of GDP in the UK.

00:11:36:02 - 00:11:39:09
It's in areas the government really need to get right to control,

00:11:39:10 - 00:11:42:13
to ensure that business can operate profitably and focus on the long term.

00:11:42:23 - 00:11:46:11
But as ever, it's not just a case of assuming that your business

00:11:46:11 - 00:11:48:14
is going to qualify for inheritance tax relief

00:11:48:14 - 00:11:51:14
anyway as the circumstances now where it still doesn't apply.

00:11:51:15 - 00:11:52:16
So if this is something that you're going

00:11:52:16 - 00:11:55:21
to be looking to rely on, it's well worth keeping under review.

00:11:55:21 - 00:11:59:22
But reviewing it properly rather than just keeping the defaults

00:12:00:02 - 00:12:01:11
option some people take,

00:12:01:11 - 00:12:04:11
which is, oh, I own a business, it's going to be free of inheritance tax.

00:12:04:18 - 00:12:09:02
James, thank you for these very insightful comments and for joining us today.

00:12:09:02 - 00:12:12:03
Thanks everyone for listening to to our podcast today.

00:12:12:12 - 00:12:16:04
We hope you enjoyed and please remember to like, subscribe

00:12:16:04 - 00:12:17:19
and leave a review after listening.

00:12:19:07 - 00:12:22:03
In the next few days we'll obviously know a lot more.

00:12:22:03 - 00:12:24:09
Okay, the game is afoot

00:12:24:09 - 00:12:26:14
really, as of today.

00:12:26:14 - 00:12:30:01
So our next podcast will be on Friday 2nd August,

00:12:30:01 - 00:12:33:01
and we'll know a lot more by that time,

00:12:33:17 - 00:12:37:23
so we will delve further into Labour's policies  and what these could mean for you.