What would a Labour government mean for investors?
Investors seem to have little to fear from a Starmer administration keen to emphasise its commitment to fiscal responsibility
Consistently well ahead in the polls since the Conservative government’s implosion last summer, Labour seems ever more likely to win next year’s general election. So it now seems appropriate to ask: what would a Labour administration mean for investors?
Until recently it has been impossible to say. Keir Starmer’s leadership has been more concerned to deconstruct Jeremy Corbyn’s left-wing programme than to construct an alternative.
Contrary to much overwrought commentary Corbyn was less intent on socialist revolution than a reassertion of social democracy, a rebalancing of power from the market to the state, the employer to the worker. But elements of the programme would undoubtedly have had significant implications for investors, most notably the commitments to extend public ownership and employee share ownership.
Labour’s 2019 manifesto proposed nationalising the railways, the Royal Mail, and public utilities like water and energy. More radical still, the party’s plans for ‘inclusive ownership funds’ would have required every company with more than 250 staff to gradually transfer 10% of their shares to workers.
Though motivated by a social democratic concern to recalibrate the proceeds of wealth generation from boardrooms to workers, rather than thoughts of revolution, the initiative would have forced a major transfer of equity from existing shareholders, requisitioning, according to one analysis, £300bn worth of shares from more than 7,000 companies. Matt Kilcoyne of the Adam Smith Institute spoke for many investors in describing the proposal as ‘expropriation’: ‘Our largest investors are pension funds and they’ll see billions of pounds wiped off their books. So we’ll all see the value of our pensions fall. It’s the biggest raid of all our nest eggs in living memory.’
All of that has been wiped away by Starmer, who has pared back the party’s programme so severely that it has been scarcely possible to detect what impact — if any — a Labour government would have on the financial sector.
According to the party’s current programme, public utilities, with the exception of the railways, would stay in private hands. Paying down public sector debt would take priority over new spending. There would be no return to the EU’s single market or negotiation of a customs union. And, significantly for shareholders, there are no plans to equalise capital gains and income tax rates, or to cut tax breaks on pension contributions for higher earners.
At present the party’s headline tax reform is its commitment to end ‘carried interest’, a loophole used by private equity executives to reduce the amount of tax paid on their share of the profits. Even here Labour has been at pains to stress its moderation, pursuing an ongoing charm offensive with senior executives from investment groups, the effectiveness of which is testified by the sanguine remarks of Michael Moore, chief executive of the trade group British Private Equity and Venture Capital Association, regarding the party’s proposals: ‘While some aspects can be uncomfortable at times, the good news for us is that Labour has gone in 18 months from talking about ‘asset strippers’ to openly engaging with us on how the industry contributes to growth in the economy.’
Pensions reform
As the next election approaches, however, elements of Labour’s programme that would have implications for investors are shifting into focus.
It seems increasingly likely, for example, that a Labour government would undertake radical reform of Britain’s creaking pensions system. The issues are well documented. UK pensions, fractured into thousands of small funds, are investing less and less in London-listed equities, choking businesses of capital, damaging the status of UK exchanges, and depriving savers of the higher returns they might earn from shares rather than fixed income assets.
The average allocation to UK equities by UK defined benefit pension schemes has fallen from around 50% in 2008 to about 10% today, and the proportion of all UK pension fund assets invested in equities was down 26.4% in 2021 from 55.7% in 2001. As pension funds look elsewhere fewer companies are listing on the London markets: in Q1 this year there were just four UK listings, raising only £81m, the sixth-worst quarter for initial public offerings in the City since 1995. The UK’s pensions market is currently fractured into some 28,000 defined contribution schemes, many of which do not have the clout to stay invested in equities for the long-term.
Shadow Chancellor Rachel Reeves has floated several radical initiatives to shake things up, including a proposal to require defined contribution schemes to assign 5% of their assets in a £50bn growth fund dedicated to investment in UK equities. Unsurprisingly pension fund trustees are wary. Defending funds’ freedom to invest as they consider appropriate, Nigel Peaple, a director at the Pensions and Lifetime Savings Association, a trade body representing thousands of workplace pension plans, told the Financial Times that ‘Trustees are adamant that their role is to look after the savings of their members.’
But Labour’s plans seem aligned with an emerging consensus that something has to change. Reeve’s proposed growth fund is based on an idea first formulated by Nicholas Lyons, lord mayor of the City of London. And the current government is contemplating similar reforms, Chancellor Jeremy Hunt promising to use his Autumn Statement to ‘unlock productive investment from defined-contribution pension funds and other sources’, and expected to give more details of his thinking in his annual Mansion House speech later this month.
Labour is also interested in facilitating the merger of the UK’s myriad pension funds to create ‘superfunds’ with the scale and muscle to commit to greater investment over longer periods of time, injecting capital into UK-listed companies and boosting returns for savers. The consolidation would seek to emulate the massive pension schemes and sovereign wealth funds of Canada, Australia and Asia, which have the power and regulative leeway to commit more to early-stage companies, listed companies and other asset classes: Canadian funds invest 40.6% in equities and Australian schemes 47%.
An influential report published earlier this summer by the Tony Blair Institute for Global Change argues that tough reforms introduced in the 1990s in response to a series of pension scandals have undermined the sector’s capacity and willingness to commit to the long-term equity investments most likely to secure robust returns. Tighter rules made the defined-benefit schemes that paid pensions based on salaries unaffordable, obliging companies to replace them with defined contribution (DC) plans that placed the risk burden on savers.
Financial Times commentator Martin Wolf, noting that the state pension replaces only 22% of average earnings, calculates that ‘after 40 years of savings, at a real annual rate of return of 3 per cent, the annuity purchasable at age 65 would deliver less than 30 per cent of career average earnings without protection against inflation, at today’s interest rates.’ Large, multi-generational funds promise lower costs and greater diversification of risk. Wolf quotes a study by the Royal Society of Arts suggesting that such funds would ‘give at least a 30 per cent higher retirement income than a conventional DC scheme with an annuity.’
Pension reform, then, presents risk and opportunity for Labour. Heavy-handed prescription would further alienate an investor community with long-standing suspicions of the party’s commitment to financial markets. But a reforming government has the chance to put in place new frameworks that might would work for the benefit of the great majority of pensioners.
Bringing ‘Bidenomics’ to Britain
The possible impact of another central element of Labour’s evolving economic programme is similarly ambiguous. Starmer and Reeves speak in increasingly warm terms of President Biden’s ambitious industrial strategy, represented by Reeves as exemplifying an ‘emergent global consensus’ on the economy, involving an active state, muscular industrial policy, the ‘friendshoring’ of supply chains away from China, and high labour standards.
Labour’s ‘green prosperity plan’ has it roots in the Corbyn era’s ‘green new deal’, but now draws extensively on the grammar of ‘Bidenomics’. Inspired by the President’s Inflation Reduction Act (IRA), which includes $369bn of tax credits for clean technologies, and the Chips and Science Act, which commits $39bn in funds to stimulate semiconductor manufacturing and $24bn worth of manufacturing tax credits, Labour plans to borrow £140bn in the five years to 2030 to spend on green transition policies such as subsidising wind farms, insulating homes, building battery factories, and accelerating Britain’s nuclear programme. That makes it even more ambitious than the IRA in relative terms, requiring an annual commitment of £28bn a year against Washington’s proposed $37bn a year, even though the US has five times the UK’s population and eight times its GDP.
The plan’s ambition has generated scepticism within as well as beyond the party. Some senior Labour figures are concerned the programme would leave little to invest in public services, and conservative market commentators, noting that the plan was designed some years ago during an era of low interest rates, doubt its affordability, fearing it would further burden the UK’s overloaded public debt.
Speaking to the Financial Times, Mike Riddell, a global bond fund manager at Allianz Global Investors, said an increase in issuance of green gilts could push up yields, risking the kind of ‘gilt meltdown’ that followed the Truss administration’s ill-starred emergency budget last autumn. Quentin Fitzsimmons, a senior portfolio manager at T Rowe Price, worried that the programme would add to a British tax burden now at its highest level as a percentage of GDP since the 1940s. Labour’s plan marks a clear point of difference with Conservative policy, Rishi Sunak having consistently opposed the very concept of an industrial strategy, both as Chancellor and as Prime Minister.
As the plan is subjected to closer scrutiny Labour has back-pedalled somewhat, stressing that Labour’s programme will be founded on ‘the rock of fiscal responsibility’. Reeves says a Starmer administration would take a couple of years to ramp up spending to the £28bn target, and that the commitment would have to comply with Labour’s fiscal rule that debt must fall as a share of GDP after five years. And Pat McFadden, shadow chief secretary to the Treasury, says that ‘We have seen what happens to the public finances after a rightwing sugar rush of irresponsibility. We won’t respond with a mirror image of that disaster. Where we have spending proposals we will explain how they would be funded.’
Biden’s infrastructure spending seems to be yielding positive results. Since the two Acts were passed companies have committed more than $200bn to US manufacturing projects, and investment in semiconductor and clean tech investments is almost double the commitments made in the same sectors in the whole of 2021, and nearly 20 times the amount in 2019. Time will tell whether Labour’s plan will be similarly effective. It seems likely that as Chancellor Reeves would be keener to emphasise Labour’s commitment to fiscal responsibility than to risk market sentiment by following the green prosperity plan to the letter.
Winding down North Sea extraction
The impact of Labour’s firm commitment to ban all new North Sea fossil fuel extraction licences seems less equivocal, certainly for energy investors. This year Starmer has repeatedly confirmed that although companies would be able to exploit sites which already have existing permission from regulators Labour would issue no new North Sea licences.
Like the green prosperity plan the proposal has provoked fierce debate within the party. For Labour’s substantial base of environmentally concerned supporters the policy does not go far enough. But union leaders representing North Sea workers have called on Starmer to reverse the plans. Gary Smith, head of the GMB union, has joined industry representatives in arguing there is a ‘national security imperative’ to keep Britain’s oil and gas industry alive given the country will keep using those fuels for decades as it works towards the Net Zero 2050 target. Industry trade body Offshore Energies UK, observing that last year Britain imported 62% of its gas and 18% of its oil, argues it is necessary to maintain domestic production to reduce reliance on imports. The UK still has reserves equivalent to 15 billion barrels of oil.
But other industry commentators are sceptical that any increase in oil and gas production in the North Sea would lower prices in the UK, which are set by international markets. After 50 years of exploration the North Sea is a declining field: output has been falling by about 5% a year and the deposits that are left are generally harder to extract. Andrew Latham, an analyst at Wood Mackenzie, says there are only ‘modest’ opportunities in the North Sea. Global upstream oil and gas investment has fallen from $700bn since 2014 to $400bn a year. Demand for hydrocarbons will persist through the energy transition, but the shift to renewables means there is less certainty about how long that demand will persist.
Labour’s ban would have obvious consequences for energy investors focused on the North Sea, but the commitment of the current government to the industry, with its Net Zero pledges and windfall taxes, is far from clear. A Labour administration seems likely to accelerate an inevitable trend.
Establishing credibility
The next general election is probably still a year-and-a-half or so away. Labour’s programme is still evolving in response to changing economic circumstances. Any assessment of what a Labour government would mean for investors is currently little more than educated guesswork.
But it seems clear that after the freewheeling Corbyn years, Starmer’s Labour, like New Labour before it, has a laser focus on establishing the party’s economic credibility. The proposed green investment programme has the capacity to hurt rather than hinder the economy if introduced without regard to fiscal constraints. But that seems highly unlikely under the ultra cautious Starmer-Reeves axis. Pension reform seems likely to follow a similar course, with caution emphasised over radical change.
Investors seeking to peer into the future might be advised to consider the reserve that characterised Tony Blair’s first term, an administration that, in granting independence to the Bank of England, was in some ways more conservative than the John Major government that preceded it. It would seem, then, that the prospect of a Labour government under this leadership should give long-term investors no reason to re-examine their commitment to UK markets.
Image collage by Justin Reynolds.
