The Fiscal Dispatch with Atticus Partners

Welcome to the Atticus Partners Financial Services newsletter: The Fiscal Dispatch.??

Once a month, we cover the topic stories relating to Financial Services (FS) in Westminster and Whitehall.??

In this edition, we look at general election’s effect on stocks and sterling, Labour’s National Wealth Fund, interest rates, non-dom status under the Labour Government and the UK’s biggest overhaul of listings regime in decades.?

For more information about Atticus’ work in FS, or queries about the support you require, please get in touch via [email protected].???

Labour stabilising the economy from Day 1?

Following Labour's victory in the general election, UK stocks and sterling saw modest gains. The FTSE 100 rose 0.4%, and the pound increased 0.1% against the dollar to $1.2771. Labour won 411 out of 650 seats, while the Conservative Party dropped to 121 seats. Investors are hopeful the new government will bring political and economic stability, a shift from the volatility under the Conservatives, marked by Brexit and the 2022 "mini" Budget turmoil.?

Labour's focus on financial stability has bolstered investor confidence, reflected in the rising FTSE 100 and sterling. However, challenges remain, including tight fiscal constraints and slow economic growth. Chancellor Rachel Reeves has pledged to reduce debt as a proportion of GDP, raising concerns about funding Labour's policies on the NHS and education.?

Comparatively, the UK's political stability is favourable against other countries like France, where recent elections have led to market instability. This relative stability may attract more investment to the UK, offering a potential economic boost. Long-term prospects include potential planning reforms that could stimulate growth and improve UK stock performance, which has lagged behind US and European markets over the past decade.?

Labour’s National Wealth Fund?

Chancellor Rachel Reeves has announced the launch of the ￡7.3 billion National Wealth Fund, an ambitious new Labour Government initiative aimed at decarbonising Britain's economy. This fund will focus on investments in green technologies, such as green steel production and gigafactories, with a strong emphasis on mobilising financial services to achieve these goals.??

Effective immediately, the Wealth Fund will operate through an already established entity, the UK Infrastructure Bank (UKIB). This was decided to ensure a swift rollout of funds, as previously the establishment of the Green Investment Bank and UKIB took around four years to be fully operational. Speed is very much being of the essence after a recent report found that the UK requires ￡40bn a year of investment in low carbon and digital infrastructure over the next ten years to meet the target of net zero by 2050.?

Reeves highlighted the necessity of reforms within the UKIB to leverage institutional capital for low-carbon investments. The National Wealth Fund is designed to act as "catalytic" capital, taking on risks unattractive to traditional infrastructure funds, thereby stimulating private investment in key sectors for decarbonisation. The Government hopes that by liberalising what the ‘deep pools’ of institutional capital in the UK, such as pension monies, can invest in, the new fund hopes to attract an additional ￡20 billion a year from the private sector. Quite some way from the supposed ￡40bn required.?

The establishment of the National Wealth Fund derives from a Labour-commissioned review led by a task force comprising of notable figures such as former Bank of England Governor Mark Carney and executives from leading financial services firms including Aviva, Legal & General, and NatWest. It was this task force that recommended situating the National Wealth Fund within an existing body, like the UKIB, to meet Labour’s commitment to creating the fastest-growing economy in the G7.??

This innovative policy begins the launch of various schemes, such as Great British Energy, that Labour is keen to promote as examples of a changed and renewed Government. Yet with reports estimating that the UK will require an average of ￡40bn invested a year to meet the 2050 Net Zero target – does the new National Wealth Fund go far enough??

Calls for interest rates to be held?

Whilst there has been a possibility that interest rates would be cut in June, although this likely did not occur due to general election campaign and the Bank of England’s (BoE) desire to stay impartial, the market expectation has been that interest rates would be cut in August.?

Jonathan Haskel, a member of the BoE’s Monetary Policy Committee (MPC), appeared to pour cold water on this in a speech at King’s College London saying that he would rather “hold rates until there is more certainty that underlying inflationary pressures have subsided sustainably.” He also predicted that inflation would rise about the BoE’s 2% target, thus justifying the holding of interest rates. Haskel wasn’t all doom and gloom, adding that there were “considerable encouraging signs” on inflation.?

The new Labour Government will likely want to see a fall in interest rates rapidly, as mortgage lenders keep their rates high which is biting homeowners heavily, so that they are able to preside over an easing in the cost-of-living crisis. Whether Mr Haskel is able to convince his fellow members of the MPC of his viewpoint, will be a story to watch in August.?

Non-doms under pressure despite paying a greater share of tax?

The arrival of a new Labour Government is bad news for those who are non-domiciled, with their manifesto pledging to “abolish non-dom status once and for all” and to replace it with a “modern scheme.” This promise has gone down like a lead balloon amongst those affected with Mark Davies, a tax advisor to the uber-wealthy, commenting that whilst a “mass exodus” may not occur “some are not waiting.” Alessandro Belluzzo, founder of the wealth advisory Belluzzo International Partners, went further and claimed that up to 30% of non-doms could leave the UK in response to Labour’s plans.?

All this came as reports emerged that the amount of tax paid by non-doms rose to ￡8.9 billion during the 2022-23 financial year, marking a 6% increase from the previous year and the highest amount since 2017. As Labour plans to present its budget later this year, and the status of non-doms likely comes to an end, whether they decide to stay or go will affect the Government’s future finances.?

UK overhauls listing rules to revive capital markets amidst global competition?

Regulators have approved a major overhaul of rules for London-listed companies to boost the UK's capital markets amidst competition and investment outflows. Effective 29 July, the new rules empower company bosses to make decisions without shareholder votes and allow dual-class share structures, giving founders and venture capital firms stronger voting rights.??

Despite warnings from the Financial Conduct Authority (FCA) about higher investor risk, the changes aim to align the UK's listing practices with international standards to attract innovative companies. This move follows two public consultations and is part of broader reforms, including the Edinburgh and Mansion House initiatives, to foster greater investment and risk-taking in UK assets.??

The Labour government, continuing the Conservative-initiated reforms, supports these changes to invigorate the financial sector. Additionally, the FCA plans a review of the UK’s prospectus rules this summer. The new listing rules also permit institutional investors, like private equity firms, to hold super voting rights for up to 10 years, with exceptions for sovereign wealth funds. The FCA acknowledged investor opposition but emphasised that these reforms are crucial for maintaining the UK’s competitive edge in global markets. The rules will simplify the regime by merging the premium and standard segments into one category, with transitional arrangements for existing companies.?

Insights from Atticus?

• Reeves Unveils Labour’s Vision for Economic Revival and Growth?

For more information about Atticus’ work in FS, or queries about the support you require, please get in touch via [email protected]. ?