Oliver Jones, head of Asset Allocation, Rathbones Investment Management, says the reforms to the ISA regime announced in the Spring Budget are marginally positive but more is needed if the UK equity investment market is to be resuscitated.
Chancellor Jeremy Hunt used his Spring Budget to announce some creative new measures designed to encourage investment in UK equities, building on his Mansion House reform agenda. These should funnel some additional cash from domestic pension funds and retail investors into the UK stock market, which will be a positive at the margin. But they’re certainly not a gamechanger, and the sums involved could fall far short of optimistic projections. A bigger re-rating of the market will require winning back the confidence of foreign investors, who have soured on UK assets in the period of intense policy uncertainty since 2016.
Jeremy Hunt announced a new ‘British ISA’ – an additional tax-free allowance of £5,000 to be invested exclusively in UK assets. To understand how much difference this might make, it’s worth looking at how the ISA system works now. According to HMRC’s latest statistics, 22.2 million people in the UK have ISAs. But of that number, only 1.6 million made the previous maximum annual contribution of £20,000, and 0.7 million of those were to cash ISAs, rather than stocks and shares. So comparatively few people were constrained from investing more in UK equities by the existing limits. Assuming (generously) than the remaining 0.9 million people all invest an additional £5,000 exclusively in UK equities each year gives a figure of £4.5bn. That’s far less than some of the optimistic projections we’ve seen and is small beer to a market with a capitalisation of more than £2 trillion.
Meanwhile, the Chancellor built on the reforms announced in his Mansion House speeches last year to encourage reform in the pension sector, including directing more investment towards UK equities. He announced that local authority and defined benefit pension funds will be forced to disclose the share of their assets invested in UK equities. But greater disclosure alone won’t change much – it’s already widely known that pension funds’ allocation to the UK has been in long-term decline. Some further measures were announced to encourage investment by pension funds in UK life sciences and technology companies, but the sums involved are small.
It’s true that UK equities trade at significant discount to their global peers. We’ve shown that their valuations are low by international standards, even if you adjust for sector composition, measures of companies’ quality and their growth track records. But that discount emerged only after the 2016 vote to leave the EU, when surveys tell us that the UK fell out of favour with international investors as uncertainty over the policy outlook surged. A prolonged period of policy stability, and more progress addressing the UK economy’s structural problems (including the state of the health service, limited housebuilding and weak business investment) would help more in this regard.
Election shadow
The shadow of the impending general election loomed over the budget. The Chancellor announced another reduction in the headline rate of National Insurance (of two percentage points) in a bid to shore up his party’s flagging support. But that cut will do little to change the near-term economic outlook, and the work of dealing with the bigger structural problems facing the UK economy has largely been left until after the election.
The context is that Labour has maintained a steady lead over the Conservatives of about 20 percentage points for more than a year now, while the Prime Minister’s personal approval rating has sunk to levels comparable with Jeremy Corbyn’s in 2019. It’s hard to see the National Insurance cut announced today moving the dial much. The Chancellor had already announced the same thing at November’s Autumn Statement, to no avail. The Conservatives therefore have a mountain to climb to prevent a Labour victory, so today’s budget tells us little about the policy outlook beyond the next few months.
Whoever is Chancellor after the election will have a tough job on their hands. To lift the UK’s long-term growth rate, they’ll need to address the state of the health service and housebuilding, as well as reviving business investment. But they will find their room for manoeuvre severely limited by the fiscal rules which both main parties have pledged to follow. Current spending plans contain implausibly sharp cuts to departmental spending to meet these rules, so something will have to give.
Main image photo by Cambridge based photographer Chris Boland
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