Should investors trust in Truss?
Ever had a first day at a new job with absolutely nothing to do?
“One of the guys from tech support will be up in a minute,” your manager says with a welcoming smile. “They’ll get you onto email and the other services”.
She then disappears into a three-hour meeting.
There’s no sign of the tech support guy. You can’t get past the screensaver log-in.
The minute hand on the office clock ticks slowly around.
Is 12pm too early for lunch?
Liz Truss’s first day at the office was surely nothing like that.
Rarely outside of war has a new Prime Minister faced such a towering in-tray marked ‘Urgent’.
Indeed, our latest leader doesn’t even have peace on her side. Britain is an ardent backer of Ukraine against Russia, after all.
Russian aggression is also behind the energy crisis that must be Truss’s first order of business.
Civil servants, MPs, and lobbyists alike will also be tugging at her sleeve for action to resolve the post-Brexit stalemate in Northern Ireland, the wider cost-of-living crisis, action on climate change after an exceptionally dry summer – oh, and she’ll need to rehabilitate the reputation of politics after the scandals that toppled her predecessor and gifted her the opportunity.
Not to mention the NHS seems one last Covid wave away from collapse.
It’s quite a To Do list. The priorities of everyday investors like you and me won’t be front of mind.
Yet investing is what we do at The Motley Fool. And long-term saving and investing is vital if we are all to live our best lives without becoming a burden to the state.
So what would we press the new Prime Minister to get on with?
Tackling the energy crisis has rightly been top priority for the new administration, with a raft of new measures announced on Thursday.
The energy regulator Ofgem had set a price cap for October at £3,549 – an 80% rise in six months. Experts scrambled to predict ever-higher charges, and one recent forecast would have put the cap at £6,552 in April 2023, before Thursday’s announcements.
Such bills would have crippled many households.
Less reported has been the impact on businesses. Prices here have not previously been capped at all.
Smaller FTSE 350 and AIM companies in the hospitality and manufacturing sectors – low-margin at the best of times – could have been crushed by sky-high energy costs.
The consequences would have rippled through the economy.
So investors have many reasons to applaud action on energy prices – not just as bill payers.
Of course, there will be a price to government intervention. Higher taxes now or in the future.
But it’s really a matter of pick your poison. Not acting was not an option.
Pounding the table
Government action on the energy crisis does pile more pressure on our creaking public finances.
At the latest count, UK public sector debt stood at £2,348trn – or 96% of GDP.
The highest level since the 1960s.
Moreover, the UK is running a record current account deficit of 7% to 8% of GDP.
This difference between the level of UK exports and imports is financed by overseas capital – the “kindness of strangers” as former Bank of England governor Mark Carney once put it – or if not then perhaps by the IMF, as Britain saw in the 1970s.
The UK has the highest inflation rate among G10 nations. Productivity gains are stagnant.
Meanwhile the Bank of England predicts an imminent recession, even as it raises interest rates.
Higher interest rates in turn increase the cost of servicing government debt.
All bad! But not yet a reason to panic.
UK government borrowing has a lengthy maturity profile. We won’t struggle to meet our obligations anytime soon.
But investors must hope Truss can retain the confidence of international capital. Campaigning talk about reviewing the mandate of the Bank of England, for instance, should be kicked into touch.
The weak pound is partly a gauge of investor uncertainty. A pound now buys just $1.15. Some City analysts believe we’re headed to parity with the US dollar.
This weakness makes imports (including energy) more expensive and fuels inflation.
British money buys less on the global stage. Not something we investors should root for.
Another of Liz Truss’s campaign pledges was to reverse former chancellor Rishi Sunak’s planned rise in corporation tax.
Putting aside the question of funding the reversal, this would be good news for British companies.
A simple price-to-earnings ratio tells us companies that retain more of their earnings are more valuable.
And paying less tax leaves more cash to reinvest, raise wages, reduce debt, or pay dividends.
A lower corporation tax regime might also attract that overseas investment.
Truss has also pledged to reverse this year’s 1.25% National Insurance rise.
There’s even aspirational noises about cutting income tax.
Tax cuts put more money into people’s pockets – and give us more money to invest, of course – but unless the cuts boost growth they will also further pressure the UK’s public finances.
Personally, I’d prefer a pro-growth agenda focused on innovation and the technology firms of tomorrow.
Fools know that investing broadly in the tech sector today means putting money to work overseas. Domestic opportunities above the micro-cap scale can be counted on one hand.
An expanding UK tech sector could be good for our returns, as well as for Great Britain PLC.
One area no politician talks much about these days are the savings allowances for ISAs and pensions – including the lifetime allowance for pensions.
That’s understandable. For the past few years Britain has lurched from one thing to another. ISAs, for example, were born and boosted in more prosperous times.
Nevertheless, the fact is the annual ISA allowance has been frozen at £20,000 since 2017.
The annual allowance for tax relief on pension savings has been £40,000 since 2014.
The pension lifetime allowance has been at or just above £1m since 2016. In 2012 it was £1.8m!
These might seem generous allowances in the midst of a cost-of-living crisis.
But by freezing them, their attractions atrophy – even faster with double-digit inflation.
Raising these allowances won’t be a priority. But for investors, there is no surer uplift to our long-term returns than sheltering them from the ravages of taxation.
She’s got mail
Lastly, Truss has vowed to sweep away EU regulations in light of Brexit.
I’d question though whether there’s much red tape to be thrown on the bonfire when it comes to financial regulation. Not if we are to protect consumers and investors.
Any listener to Radio 4’s Moneybox knows there are enough dodgy outfits around to warrant even tougher regulation.
That said, I was glad the Financial Conduct Authority made changes to the EU’s Key Information Document (KIDs) rules. The EU-mandated disclosures often shed more confusion than light.
The FCA is now undertaking a wider review. And perhaps there are other ways in which UK regulation can be better tailored towards the UK’s more self-directed investing environment.
But I’d put financial stability top of my investor wish list, followed by higher savings allowances. Let’s just hope Prime Minister Truss has been set up with email and is on the case!