UK wealthy ‘wait and see’ post-election

A distinctly anti-wealth and anti-business bias was beginning to develop in UK government circles before the election. Rochelle Toplensky asks wealth managers how they are positioning client portfolios now

No investor, or their advisor, is likely to make precipitous moves on the back of declarations during an election campaign. Suggested moves to target the wealthy have raised concerns, if not alarm. But wealth managers are recommending clients adopt a ‘hold and see’ view on their portfolios for the moment, hoping that a new government returns to an investment friendly climate.

Meanwhile, investors should hold UK equity assets, avoid UK bonds and invest tactically in the undervalued sterling, say strategists. “UK debt is not attractive, as the UK corporate sector is in better shape than the government” according to Kevin Gardiner, head of investment strategy at Barclays Wealth.

Max King, investment manager and strategist at Investec, says some expatriates are moving from the UK, but most wealthy UK investors are staying put for now. “The UK equity market is a global market, with two thirds of revenue derived from overseas earnings,” he explains. Sterling is now under valued, and there are opportunities to take tactical positions.

Much has been made of the recent increase in the top marginal tax rate to 50%, and the levies set on banking bonuses, but it remains to be seen if these represent a permanent shift in UK tax policy.

With inconclusive election results, the strength of any new UK government and its ability to take decisive action to address fiscal and budget deficits is unknown. It will have to produce a plan to avoid a debt rating downgrade, while balancing the timing and form of spending cuts and tax increases to avoid crushing any economic recovery.

A return to an investment friendly regime could prove a watershed for the UK economy. “A commitment to drop the top marginal tax rate at a set future date could communicate a more investment friendly direction,” suggests Philip Lawlor, investment strategist at Smith & Williamson, a UK family office and investment firm.

Property assets in the UK are still attractive, and even expatriates who are considering relocating, most will keep their UK base. Property firm Savills reports continuing demand for London properties as international investors take advantage of the soft currency to buy in London.

The capital retains the enduring features which helped establish it as the pre-eminent global financial centre. Gardiner at Barclays Wealth says the City is still a welcoming international community with a world view burnished over 350 years. A time zone that spans America and Asia, a pool of existing financial expertise and English as the international business language underpins its attraction.

However, some managers worry punitive UK and EU regulations could drive front office functions away, leaving only the back office in the UK. Many hedge fund managers have looked to open offices in Switzerland recently, wary of uncertainty over a higher rate of taxation and an increased EU regulatory burden that may hamper their ability to hire top talent in the UK.

Observes Lawlor: “Hedge funds need critical mass, and there is a risk that those who have opened offices in Switzerland may pave the way for a large scale shift.” Others believe that point has already been passed. “The current political establishment wants to repel the world’s wealthy from living and working in the UK,” says King. He warns of “legislation in haste, being repented at leisure”.

How the new UK government implements tighter supervision could prove to be a watershed. Critically, if only the UK tightens banking regulations, international banks will rethink London as their EU or even global headquarters. Private bankers warn that although clients are unlikely to move quickly, it is the pipeline of talent and investment which will be most affected.

“People have homes, friends, children in school here. They are not going to jump quickly. But others whop might be considering moving to the UK., or basing here., will just decide it is easier elsewhere. The effect will be felt in eight to 10 years form now,” said one.

There is time to re-balance the message, and addressing fiscal and budget deficits while maintaining an investment-friendly environment is not impossible. The advantage the UK currently enjoys is the possibility that it will recover more quickly from the current crisis than other economies. But without a full pipeline of investment and productivity, it will be a longer, harder plod to recovery.

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