GCC investors can make money in Starmer’s Britain

July 5, 2024, 11:07 AM

Keir Starmer, leader of Britain's Labour party, reacts as he speaks at a reception to celebrate his win in the election, at Tate Modern, in London, Britain, July 5, 2024. TPX IMAGES OF THE DAY — Sir Keir Starmer, leader of Britain's Labour party, speaks at a reception to celebrate his win in the general election at the Tate Modern in London

Labour’s historic win on election day has reinforced the bullish case for investing in UK assets.

Sir Keir Starmer promises to bring fiscal discipline to the UK at a time when its $3 trillion economy is just emerging from a technical recession, exports are rising and inflation has fallen sharply from its 11 percent post-pandemic high to 2 percent.

Sterling money market futures now price in two Bank of England rate cuts before the end of the year.

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The restoration of political stability in Westminster alone is a tailwind, since the 14-year Tory tenure in Downing Street imposed a steep risk premium on UK assets as it coincided with austerity policies, the Brexit vote, the Scottish independence referendum, bitter negotiations with the EU and, above all, the sterling/gilt crash after Liz Truss’s catastrophic mini-budget in 2022

The Labour win also coincides with a political crisis in France and a steep rise in US election uncertainty after President Joe Biden’s dismal performance in the CNN debate.

British assets which are unloved and under-owned in most fund manager portfolios now appear attractive, as the new government stresses fiscal caution, a focus on wealth creation, a 2.5 percent GDP growth target and better relations with the EU.

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The new chancellor, Rachel Reeves, is also a former Bank of England economist, and Labour’s leading exponent of economic policy orthodoxy, after Starmer repudiated Jeremy Corbyn’s interventionist, tax and spend socialist agenda.

2024 is not a replay of Blair’s 1997 Cool Britannia rally, but GCC investors can make money across major UK asset classes.

In foreign exchange, sterling is undervalued against the euro at 0.84p and could well appreciate to 0.79p-0.80p as France’s political gridlock and public finance nightmare take its toll on the euro.

In global debt markets, UK gilts have compelling relative value, with the yield on the 10-year note at 4.2 percent, inflation at only 2 percent and the prospects of two 0.25-point base rate cuts in 2024.

The spike in French government debt yields at a time when the volatility on sterling debt has hit new lows suggests that global investors value Starmer’s tilt to stability and fiscal caution.

In equities, the Bank of America’s monthly survey of fund managers in June revealed that global investors preferred the UK and Spain over the rest of Europe’s bourses.

It is no coincidence that the FTSE 100 index was up a full 1 percent to 8,250 on election day. Here too, UK equities are undervalued relative to their improving economic growth and corporate earnings prospects. Labour’s likely windfall tax on energy makes me avoid North Sea oil and gas producers.

As the Bank of England pivots to easy money, banks and utilities are also winners

Starmer’s promise to construct 1.5 million affordable homes in the next five years, while ambitious, provides bullish ballast for UK housebuilder shares.

Banks and utilities are also winners, as the Old Lady of Threadneedle Street pivots to easy money at a time when British households and corporate savings exceed £350 billion.

Chancellor Reeves is Labour’s ideal ambassador to the grandees of the City of London, and macro stars are aligned for a sustainable rally in British equities.

Political stability, higher economic growth, 3 percent wage growth and pre-pandemic levels of housing affordability also suggests that UK home prices are undervalued.

Bullish financial markets in the UK will boost investor confidence in the property sector as mortgage rates decline in the next six months.

The uptick in mortgage approvals in June reflects a shift in psychology, as well as the financial firepower in UK household balance sheets. Five-year fixed-rate UK mortgages could well decline to 4 percent by early 2025.

Starmer’s promise to boost home construction must overcome the Gordian knot of planning regulation, but rising rental yields, as well as a supply deficit, will anchor home values.

It is not all positive, however.

Labour cannot meet its admittedly modest spending targets without new sources of tax revenue, so some GCC investors may be hit by higher property taxes on mansions and luxury second homes, as non-domiciled investors and offshore trusts are an obvious target in the autumn budget.

Hedge fund and private equity multi-millionaires in the City will be negatively affected by a change in the tax laws on carried interest.

Yet this is the silver lining for the UAE, the preferred destination for most of the 9,600 high-net-worth Britons expected to migrate out of the sceptred isle in the next year, more than any country in the world except Xi Jinping’s China.

Dubai’s DIFC and Abu Dhabi’s ADGM message to Starmer is thus: “Marhaba” – welcome!

Matein Khalid is the chief investment officer in the private office of Abdulla Saeed Al Naboodah and the CEO designate of a venture capital firm. He is also an adjunct professor of real estate investing and banking at the American University of Sharjah