After Theresa May’s decision to call a snap UK election, attention has turned to the potential impact on investors, homeowners, pensioners and savers.
Market reaction will be one factor shaping the outlook for personal finances; another will be the prospect of parties revising commitments on tax, investment and pensions as they look to the next Parliament.
While more details and policy differences are expected to emerge with the publication of party manifestos in May, FT Money reporters assess the immediate repercussions for readers.
What does it mean for the pound?
Sterling has bounced, with the pound hitting a five-month high and climbing by 2.7 per cent. This is a sharp reversal of proceedings following the UK’s vote to leave the EU, which caused the pound to drop sharply.
The positive mood in currency markets has left some investors confused, however. “I was surprised by the surge in the pound, because elections normally mean uncertainty, which is bad for currency,” said Eric Moore of Miton, the fund group. “The only interpretation that makes any sense to me is that the currency markets are saying the Tories will be returned with a majority . . . and Parliament will do as it’s told.”
Azad Zangana, senior European economist for Schroders, said there were “various theories” as to why sterling was on the up. Aside from the possibility that an election could increase Mrs May’s power, an election has “introduced the possibility that Brexit could end up being very soft, or not happen at all”, said Mr Zangana.
Some were predicting the rally would be shortlived and that currency traders were betting on a second referendum: “Sterling’s positive reaction to the early election is based on an assumption that there will be a reprieve on Brexit and a potential second referendum,” said Dominic Rossi, chief executive officer of global equities at Fidelity International. “This is far from the truth, and the market is misinterpreting the situation. Brexit will happen.”
How has the stock market reacted?
Stock markets have also broadly reversed their immediate post-referendum trends. Back in June the FTSE 100 index rose as investors bought shares in companies with overseas exposure, while the mid-cap FTSE 250 fell. The key difference between the two is related to currency: the blue-chip index makes about 70 per cent of its earnings in dollars or euros, while the FTSE 250 is much more exposed to sterling.
As a rule of thumb, a weaker pound benefits the FTSE 100, while a stronger pound benefits the domestically focused FTSE 250. While both indices fell on Tuesday as investors tried to position themselves, the blue-chip index has continued to fall while the mid-caps initially bounced back.
Sectors are broadly rising or falling based on the currency of their earnings, with UK housebuilders in the ascendant and miners, oils and pharmaceuticals — which earn largely in dollars — dropping.
James Clunie, fund manager at Jupiter, said the type of stock that fell in value after the Brexit vote was now rising in price. “There’s a little bit of a rotation in stocks,” he said, pointing to companies such as estate agency Countrywide and flooring company Carpetright, which were “domestic and beaten up” but were becoming attractive to managers again.
“They were victims of the rotation away from that kind of stock, and post-Brexit they really slumped,” said Mr Clunie, who added that he had experienced poor liquidity in smaller, domestically focused stocks since the election announcement. Poor liquidity can signal an imminent movement in a given share’s price, he said.
What should investors do?
It might help to ignore everyone’s predictions, according to Justin Urquhart Stewart, chief executive officer of Seven Investment Management. Fund managers did not expect the UK to vote to leave the EU or for Donald Trump to win the US election, he said. “Just when everyone is facing one way, then it is usually time to look the other way and manage the risks of exactly the opposite,” he said.
Laith Khalaf, analyst at fund supermarket Hargreaves Lansdown, agreed. “I don’t think investors should be doing anything different whatsoever,” he said. “Investment is all about keeping it simple. Save what you can, invest in good funds, use your tax shelters and keep politics out of your portfolio.”
If you really want to move your portfolio, Michelle McGrade, chief investment officer of broker TD Direct Investing, said UK businesses are in “good shape”. “The small- and mid-caps have been left behind after Brexit and so offer value,” she said.
What do we know about tax?
Taxation is one of the main dividing lines between the parties in the election, as politicians set out different visions of a tax system.
Labour has said it will target “rich” people earning more than £70,000- £80,000 for higher taxes, as it prepares to draw up its most leftwing prospectus of recent years (see box below).
The Liberal Democrats say they want to “make the wealthiest pay their fair share” by clamping down on tax dodging and ensuring unearned wealth is taxed more aggressively than earned incomes. They have also said they want a tax system that encourages low and middle earners to save for their retirement.
The Conservatives have an opportunity to scrap the “five-year tax lock” — a pledge not to raise rates of income tax, national insurance and VAT — introduced in 2015. This promise, along with undertakings to increase income tax thresholds and various spending pledges, has boxed in the Treasury. Philip Hammond, the chancellor, has said he was “extremely constrained” by the manifesto pledges, in a sign he is likely to resist renewing at least some of them.
But Conservative politicians may come under pressure to rule out an increase in national insurance contributions for the self-employed. Last month, Mr Hammond was forced to reverse a planned tax rise in the face of a backbench mutiny — though he insisted the government continued to believe its approach was right.
Labour may try to take advantage of the issue during the election campaign, as it previously argued that the government had its priorities “absolutely wrong” because it was raising taxes for the self-employed while cutting corporation tax.
Will pensions figure in the campaign?
Yes, the state pension and tax relief are likely to be key battlegrounds. On the state pension, the costly triple lock on the state pension guarantees that pensioner income will rise by the higher of average earnings, prices or 2.5 per cent. Before the election announcement, the Conservatives had pledged to keep the triple lock in place until 2020, in spite of growing pressure to scrap the guarantee.
The party faces a tricky choice, as Labour has pledged to retain the triple lock if elected. Malcolm McLean, senior consultant with Barnett Waddingham, the actuarial firm, said: “They will be wary of losing some of the grey vote, bearing in mind that Labour has already committed itself to renewing the lock, should they be elected, until 2025.”
Experts say the election timing also makes it less likely that the Conservatives will push for aggressive increases in the state pension age, which could see twenty-somethings today having to work until 70 before they could retire.
“The government is supposed to set its plans for increasing the state pension age before May,” said David Robbins, senior consultant with Willis Towers Watson, the consultants.
“Holding an election a month later may make it think twice about proceeding with the fastest timetable it was considering, under which the state pension age would reach 68 in 2030. [However] if the government manages to postpone a substantive announcement, opposition parties might run scare stories about the Conservatives’ plans.”
Mr Robbins nonetheless said it was unclear how much “cut-through” such stories would have: the prospect of losing a year’s worth of state pension, worth about £8,000, “looks less terrifying when it’s over 10 years away”.
The option for Mrs May to end a current commitment not to increase tax, national insurance or VAT also has implications for retirement saving. “This opens the door for changes being made to pension tax reliefs and allowances,” Mr McLean said.
The government has previously considered reforms that would have led to the scrapping of tax relief for higher earners, but baulked at this option after a backlash from Tory backbenchers. However, experts said such reforms will be more likely if the party returns with a bigger majority.
“Despite the chancellor’s explanation for why this [reform] was postponed including lack of consensus and a desire to bed down auto-enrolment, the main reason . . . was because of fears around a reaction from within the Conservative party ranks,” said Richard Parkin, head of pension policy with Fidelity International, a pension provider.
“While Labour would have voted for lower relief for high earners, they would likely have pushed for redistribution rather than cost reduction. With a big majority, Mr Hammond could go for reducing relief especially given Mrs May’s focus on Jams [Just About Managing] who would be likely to be untouched or even benefit.”
Will the housing market be hit?
Property market experts are sanguine about the potential of the election to damp activity over the next seven weeks. Stephen Johnson, managing director of commercial lending at Shawbrook Bank, said he saw relatively little impact on the housing market from a race that appeared more certain than most. “It’s a pretty short run in and I think most people expect a straightforward majority for the Conservatives.”
A survey of 1,000 homebuyers and sellers by online agent eMoov on Tuesday found most agreed with Mr Johnson: 57 per cent of sellers and 59 per cent of buyers planned to go ahead with their transaction.
But some property experts said they would advise clients to put decisions on hold. “You’ve only got to wait seven weeks,” said Gary Festa, executive director at mortgage broker HFM Columbus. “Sit tight and see which way this goes.”
Jeremy Leaf, an estate agent in north London, said he expected a pause on buying and selling decisions until the election, a period that was “thankfully relatively short”. However, he added that a decisive outcome in any direction was “likely to result in a surge in activity at least for a honeymoon period afterwards, however long that may last.”
What are the main parties’ positions?
After the publication of the housing white paper this year, the Conservatives are likely to reinforce its prescriptions on boosting housing supply by pushing local authorities and developers to speed up their construction efforts.
Under the plans, builders that leave land undeveloped after gaining planning permission would risk having it seized by local authorities. Councils that fail to make good on their housing targets would see planning permission automatically granted to developers on sustainable schemes.
The party is also throwing its weight behind newer areas of the market such as large-scale build-to-rent by proposing adjustments to the planning system to give developers in the niche greater certainty.
All of the main parties are likely to use the election to put forward new ideas to get more homes built. Labour has previously pledged to build 1m new homes, half of them council properties. It has promised to scrap the Right to Buy policy in England and boost the construction of “affordable” homes for first-time buyers. The Lib Dems want to ease restrictions on housing finance for housing associations and councils and create a housing investment bank to fund construction.
There has been little sign from any of the main parties that they would relax recent constraints on buy-to-let, or reverse higher rates of stamp duty at the top end of the market. Regulators recently said they were continuing to monitor conditions in buy-to-let lending.
Reporting by Josephine Cumbo, Vanessa Houlder, James Pickford and Aime Williams