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UK Stock Investors See Potential Tax Boost as Johnson Q...

Business Maverick

Business Maverick

UK Stock Investors See Potential Tax Boost as Johnson Quits

Boris Johnson makes a resignation speech outside 10 Downing Street in London, UK, on July 7, 2022.
By Bloomberg
07 Jul 2022 0

News of Boris Johnson’s resignation as prime minister is fuelling speculation that a change in fiscal policy could boost Britain’s stock market.

With the relatively frugal Rishi Sunak no longer Chancellor of the Exchequer, some are betting that Conservative leadership candidates may seek support among party members and donors by pledging to cut corporate taxes. That could give domestic shares a much-needed lift.

The FTSE 250 index rose as much as 1.5% on Thursday as the pound advanced.

“If there is a plan to scrap the planned increase in corporation tax next April then UK domestic stocks may respond favorably,” said Alberto Tocchio, a portfolio manager at Kairos Partners. The levy on companies is set to be lifted to 25% from 19% next year.

READ: Boris Johnson Quits After Months of Scandals Hammer UK Tories

Britain’s midcap benchmark has slumped 20% in 2022, underperforming the Stoxx Europe 600 as Brexit intensifies the country’s cost-of-living crisis and a falling pound puts further pressure on companies. Uncertainty in Westminster has also weighed.

FTSE 250's P/E valuation premium vanishes as economic outlook darkens

 

The FTSE 100, meanwhile, has benefited from its 75% exposure to overseas revenue, leaving it relatively immune to domestic worries. The benchmark’s makeup of energy, value and defensive stocks means it has fallen less than 3% this year.

“The risk is clearly in the midcaps and smallcaps,” said Tineke Frikkee, head of U.K. equity research at Waverton Investment Management. Political uncertainty is already impacting decision-making for companies dependent on government policy, such as homebuilders, she said.

Banks, Retailers

There are specific sectors that could be affected by any change in fiscal policy, too. Tax cuts are inflationary, and could give the Bank of England further cause for concern. Rising rates boost profits for lenders like Lloyds Banking Group Plc and NatWest Group Plc, but may crimp consumer spending, impacting retailers like Next Plc and Marks & Spencer Group Plc.

Investors in utilities like Centrica Plc and oil and gas firms such as Shell Plc will also be watching closely following recent pressure to increases taxes on the sector to help with household energy bills.

UK retailers' fate hangs on consumer confidence outlook

Finally, the leadership change may impact defense companies like BAE Systems Plc, given that candidates’ plans for military spending will likely be diverse. Analysts at Citigroup said earlier this year that Johnson’s exit would benefit the sector.


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