There was no bigger sign that the Labour Party’s honeymoon period in government was over than at its annual conference in September.
Sir Keir Starmer told attendees at the Liverpool event that this week’s Budget would contain “painful” measures designed to shore up the public finances. As a public statement, it was scripted to ensure the general public’s expectations were managed.
But the message was also directed at markets.
“He was trying to get the bad news out of the way early,” says Morningstar European equity strategist Michael Field.
“Since the Budget dramas of the last few years, Labour has cottoned on to [the risk of spooking markets] and is trying to act as companies do, [when] they give you titbits of information in advance to steer you towards what is going to happen.”
Memories of the disastrous “mini-Budget” two years ago—when unfunded spending commitments sent UK gilt yields soaring and sterling plummeting and risked permanent damage to the UK’s international standing—still linger.
This has made the new government more cautious on managing expectations, Field argues. That may be one reason why the government pledged not to raise the headline rates of income tax, VAT and National Insurance.
“If they want to raise taxes beyond that, it limits them to the likes of increasing National Insurance contributions from employers. ‘Backdoor’ like taxes that are not going to be as noticeable. But [the Budget] is not going to be devastating for two reasons.
“One is that they have already scared people to some degree and the markets have ignored it. And then, two, if [they pursue] ‘backdoor’ taxes the headline impact when it comes to stocks should not be as large.”
It’s also important to remember most stocks in the FTSE 100 derive the lion’s share of their revenues from outside the UK. Any plans to increase employer National Insurance contributions would have a relatively low impact.
Year to date, the FTSE 100 is up 6.8% and the Morningstar UK Index more than 10% higher in sterling terms, a decent performance but behind US markets. That said, observers say a second record high could still occur before December. What happens in the Budget, and what the Bank of England does next following rate cuts in the US and Europe, will be important.
Which Companies Will The Government Tax at The Budget?
Andrew Raikes, portfolio manager of the TT UK Equity Fund, which has a Morningstar Medalist Rating of Gold, agrees that the Budget may not all be doom and gloom. He thinks the timing of the speech is positive for the country and investors alike.
“What you can already see is the UK market has actually lagged international markets since the summer,” he says.
“Part of the reason has been the Budget is a bit of an overhang for people’s appetite to put money to work in the UK. The media has been full of scary anecdotes, scary articles and scary headlines about how much tax is going to have to go up and you can see that to a degree showing up in consumer confidence, which took a bit of a dip.
“Getting clarity is going to be positive. And one thing that individuals and markets hate is uncertainty.”
For Raikes, some sectors will be relative winners and relative losers on Oct. 30. This year, long before reports that the Treasury would target gambling giants with fresh levies in a bid to raise between £900 and £3 billion, Raikes sold out of Betfair and Paddy Power owner Flutter FLTR.
This was a fortuitous move. After the news broke, shares in gambling companies fell sharply. Flutter’s shares fell 8.78%. Flutter is listed on the New York Stock Exchange following a listings transfer to the US in May this year, but retains a secondary listing on the London Stock Exchange.
Key Morningstar Metrics for Flutter FLTR
• Economic Moat: Narrow
• Fair Value Estimate: £196.00
• Morningstar Rating: 3 Stars
• Sector: Consumer Cyclical
• Morningstar Uncertainty Rating: High
Gambling stocks are not the only companies that could be in the crosshairs, however.
“Another key area that [could be impacted negatively] is the wealth management space because, by definition, any increases in tax or personal tax leaves people with less post-tax wealth,” he says.
However, Raikes believes that there is also an upside.
“Having said that, with the added complexity and the change in the rules, regulations, and allowances, there is an increasing need for advice.
“That is where the wealth management sector comes into it because they can offer people the best advice on how to navigate the new tax structures.”
Among the companies that could benefit is St James’s Place STJ, the UK’s largest financial advisor.
After the regulator forced it to overhaul its fee structure in October 2023, its shares suffered significantly, falling to a 15-year low in April 2024. But a cost-cutting drive and better-than-expected financial results in July sent its share price soaring once more. Year to date, shares in the company are up 30.92%, easily cancelling out a big dip in the company’s shares between March and July. Now Raikes is bullish.
“There are offsets in terms of an increased need for advice, which is something that is a key part of SJP’s offering,” he argues.
“And its share price is significantly undervalued and therefore even if there is a short-term headwind, we will be taking that opportunity to add to the position.”
SJP has recently reported an increase in its assets under management to a record £184 billion in Q3, up from the £158 billion it reported this time last year. Shares in the wealth advisor are currently trading at £8.61, below Morningstar’s Quantitative Fair Value Estimate.
Key Morningstar Metrics for St. James’s Place STJ
• Quantitative Economic Moat: None
• Quantitative Fair Value Estimate: £10.33
• Quantitative Morningstar Rating: 3 stars
• Quantitative Morningstar Uncertainty Rating: Very High
How Will Capital Gains Tax Changes Affect me?
Nevertheless, Jacob Reynolds, co-portfolio manager of the Silver-Rated Courtiers UK Equity Income Fund, is concerned that Labour’s plan to freeze the headline rates of income tax, national insurance, and VAT makes an increase in Capital Gains Tax even likelier.
According to reports, the chancellor could increase CGT on the sale of shares, with certain sources suggesting the rate paid on the sale of stocks will be equalized with that paid on the sale of property at 24%. At one point it was even rumored CGT would be increased to 39%, but the prime minister has said the idea was “wide of the mark.”
“CGT is likely to go up and the market is probably pricing that in,” Reynolds says.
“The worry is that CGT is going up too much. This 39% number keeps getting bandied around and that is going to disincentivize people investing. It does not matter if you are investing in equities, in the FTSE, in the all-share, or in small caps.”
Reynolds is also anxious to hear about the government’s spending plans.
“I would like to see them announce investment in infrastructure, roads, digital infrastructure, and energy,” he says.
“People look at the Inflation Reduction Act in the US. They do not realize how much of a world leader we are in renewables.
“We are using other people’s technology, but if you look at how we produce our energy, we are way ahead of the U.S. So, let’s carry on. Let’s keep that position. Let’s keep investing in those sectors and create jobs in market-leading technology.”
A week before the Budget, the chancellor confirmed she would be tweaking the UK’s “fiscal rules” to unlock more borrowing, a move which sent gilt yields upwards. That could mean big project spending is on the cards, but it also increases the government’s borrowing costs.
Likewise, Douglas Scott, co-manager of the Aegon UK Equity Fund, which has a Medalist Rating of Silver, expects to see planning reforms announced in the Budget that could boost housing stocks.
“The irony is that [Deputy Prime Minister] Angela Rayner was the one that blocked some of the changes that Michael Gove had proposed towards the end of his tenure, which would have been positive and freed up planning,” Scott says.
“We need to get away from politics and start doing the right thing by focusing on economics. So, freeing up planning would be helpful.”
Is The UK an Attractive Place to Invest?
But he also feels the Budget needs to address the impact of regulation on the UK’s appeal as a place of innovation and entrepreneurialism.
“I always make the point that we do not have a Microsoft or a Google,” he says.
“We never could because we’d have regulated them. We would have broken them up and they would never have been allowed to get to the size they are.
“There is a balance between regulation to order industries to function in the correct manner. But there is also a risk that you overregulate, and so you [send] capital elsewhere.”
That balance has been tricky of late.
At a UK investment summit earlier this month, the prime minister promised to reduce regulation that “needlessly holds back investment.”
That speech came right after Transport Secretary Louise Haigh publicly criticized P&O Ferries over its business practices. These remarks led owner DP World to pull out of appearing at the conference, and threaten to pause a £1 billion investment in the UK.
Starmer was quick to declare that Haigh’s remarks were not the government’s official position, but the episode showed how keen he is to win over business and just how fragile the relationship currently is.
For now, the messaging is crucial. But the waiting game is nearly over. We’ll all find out what the government’s real position is on Wednesday.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
