Election Reflection

This was the election the country needed but nobody wanted. That the parliamentary impasse needed to be broken was obvious, the choices before the electorate meant the means was less so.

In principle, I would have preferred a progressive alliance. However, the likely players in such a pact were disappointingly unconvincing. In the event, the large Tory margin we’ve ended up with is probably the best outcome we could have expected.

Mr Johnson’s majority means he is not beholden to the ERG or the DUP and can pursue a more sensible Brexit path; Labour now have five years to reflect and moderates everywhere have the opportunity to create a new party for the centre ground where the Lib Dem’s once nearly stood. Hopefully Johnson will signal his commitment to ‘one nation Toryism’ by getting shot of Rees Mogg first thing on Monday morning. This should be swiftly followed by a cull of his third-rate cabinet. There is no shortage of real talent in the Tory ranks; a hard-Brexit orientation is no longer a determining credential for a cabinet seat. Au revoir, Patel and Raab.

There is much to do beyond Brexit. As the FT noted in a recent editorial ‘Nearly a decade after the Conservatives returned to power, real wages have still not returned to their pre-crisis peak. Homelessness has risen. Basic public services such as the criminal justice system, social care and local government are dire. Privatised water and rail companies are not delivering for users. Large parts of the population feel excluded from the bright spots of prosperity, mainly in the south-east’. Labour’s manifesto was too extreme (why nationalise the post office?!) but it did at least move the focus briefly from Brexit to the myriad of challenges that we face as a nation.

What does this mean for investors? The initial market response has been overwhelmingly positive. As I write, the FTSE100 index is up over 1%, the mid-cap 250 over 5% and the pound has had its best day for years. The sigh of relief that the uncertainty is over can almost be heard here in Norwich, a hundred miles from the City of London.

Clarity is welcome but it does not overcome the likely costs of leaving the EU. Consensus opinion is that Mr Johnson’s deal would result in a 5% fall in GDP in the medium term. This is a large burden to heap on an economy that has ground to a halt. Hopefully, there is now the confidence and will to amend the deal on the table to forge a closer relationship with Europe that respects the referendum while recognising the real concerns of the 48%. Despite Mr Johnson’s decisive victory, fewer people voted for his party than for Remain/People’s Vote supporting alternatives. We are a divided country and the challenge is to heal divisions, not accentuate them.

We will have a budget early in the New Year. It is widely accepted that Austerity was a failed policy (including, recently, by Nobel laureate Esther Duflo) but the incoming administration’s wriggle room for reversing it is severely constrained by their commitment not to raise Income Tax, National Insurance or VAT. The Institute for Fiscal Studies, a think-tank, was strongly critical of this “triple tax lock”. Paul Johnson, director, said: “It is a fundamentally damaging narrative — that we can have the public services we want, with more money for health and pensions and schools — without paying for them. We can’t.”

Squaring this circle means Tory spending plans are likely to be paid for by lots of modest tax increases across the board. Be prepared for big changes in areas not covered by manifesto promises. With a large majority, Mr Johnson can afford to be unpopular early in his term. Expect changes to pension tax relief, perhaps a complete rewrite of the basis of relief. This was on the blocks, ready to go, shortly before the 2015 election but Osborne bottled out. It will take just five minutes to dust down the proposals.

I don’t try to predict anything – the central premise of an evidence-based approach to investing is that the future is unknown. But if I did, these would be my top three expectations:

• That pension tax relief will be overhauled
• That pensions will lose their Inheritance Tax advantages, especially beyond 75
• That Entrepreneurs Relief will be restricted

As far as investing is concerned, at the risk of sounding like a stuck record, we feel maintaining a globally diversified portfolio across a range of asset types remains appropriate. In other words – steady as she goes!