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Boris as PM – uncertainty and policy promises could lead to equity buying opportunities

23 July 2019

As Boris Johnson becomes the new Prime Minister, commentators point to his ‘back of a fag packet’ proposed policies and hard deal stance on Brexit as making his tenure as PM a volatile one but which could lead to buying opportunities in due course.

AJ Bell’s Tom Selby, points to 3 major policies proposed by Johnson which he could implement. The first, to raise the 40p income tax threshold by 60% from £50,000 to £80,000, he says, would represent a £9 billion tax boost to 4 million people, according to the IFS, benefitting the top 10% of earners by almost £2,500 a year.

Johnson hinted the National Insurance thresholds could be raised to help pay for the measure. He signalled also his intention to increase the point at which NI payments kick-in to boost lower earners.

“Taken together we are talking about a package of reforms costing up to £20 billion at a time when a potentially damaging No Deal Brexit appears to be looming ever larger,” Selby adds. “Johnson’s tax and NI plans feel like they’ve been scrawled on the back of a ghostly fag packet. They are certainly unlikely to be introduced overnight, and indeed they might never see the light of day at all if a general election is called.

“That said, it is not beyond the realms of possibility that they would form part of a Brexit No Deal package designed to provide short-term life support to the economy.”

The second is the promise to ‘fix’ the current NHS pension tax crisis. The issue, caused by the tapering of the annual tax-free allowance for people with total earnings above £150,000 has seen senior doctors refuse shifts to avoid large tax bills.

The Department of Health and Social Care has proposed flexibilities in the scheme so GPs and high-earning consultants can opt to pay less into their pension and in turn get lower pensions. This, it argued, would mean they could reduce or even eliminate the risk of being hit by annual allowance charges.

Selby says: “This complex fudge is unlikely to appease those affected, however, and while Johnson has not said how he will ‘fix’ the problem, scrapping the taper altogether would be the obvious solution.

“This could then be used as a starting point for a broader review of the pension tax regime, with a central aim of simplification and increasing the number of people saving for retirement.

“If Johnson does ditch the taper, however, he would blow a £1 billion hole in the Treasury’s coffers which would need to be plugged.”

The final policy is the removal of stamp duty on homes worth less than £500,000.

AJ Bell believes this would likely be one of a series of emergency Budget plans unveiled if the UK leaves the EU without a deal.

Selby comments: “The proposed stamp duty cut would represent a major giveaway of up to £10,000 for first-time buyers and £15,000 for other property buyers.

“Clearly that’s potentially good news for those looking to buy a home, although stimulating demand in such a manner without building more houses risks simply stoking house price inflation.”

Leigh Himsworth, portfolio manager at Fidelity, says as far as financial markets are concerned, Sterling will be in the spotlight, as it is reacting, “almost by the minute, to the deal/no-deal narrative”.

He adds: “While it is easy to argue that the UK equity markets offer great value versus their peer group, this is especially true of a deal or new referendum scenario. The jury remains firmly out regarding a no-deal as this would be too much of a step into the unknown.

“We may well look back in a few years’ time and regard this period as quite simply one of the best opportunities that we have seen to invest in UK equity markets.”

However,  Jason Borbora-Sheen, co-Portfolio Manager, Investec Diversified Income Fund believes investors should be wary of UK equities. He says:

“The on-going uncertainty around Brexit is arguably the worst outcome for UK assets and we must be realistic that even as our newly appointed Prime Minister takes his seat in Number 10, the ambiguity for the UK will likely continue long into the future as the trading relationship is negotiated. Therefore, we believe it is vital for investors to take a highly selective approach to allocating to the UK.”

He believes a buying opportunity will likely arise once there is more clarity over the Brexit outcome. But Johnson as Prime Minister “arguably increases the odds of a hard or no-deal Brexit, which will likely cause Sterling to weaken and would hurt the UK’s near-term growth opportunities, favouring the UK-listed multinationals over domestic plays.

“After a short while, however, we would expect investors to take advantage of the situation and start to look for oversold opportunities in the UK and add exposure.

For the Investec Diversified Income Fund he says, “we prefer to take a patient approach, waiting for greater clarity, before potentially adding more to UK equity positions.”

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