How might the general election impact finance?

If you view politics as entertainment, you might be enjoying the general election. But amidst the distraction and diversions of campaigning, there are some interesting data on how your money might fare in an election – and some vital decisions you might need to make from a tax perspective.

Inauspicious beginnings

No manifestos. At least 135 MPs declining to contest their seats. Mudslinging in the TV debates. Milkshake slinging in Clacton.

General election campaigning got off to an inauspicious start this summer. It’s hard to say things have improved.

Last year, Government researchers found 27% of people trust the UK government. Just 12% trust political parties. Are these numbers likely to climb? I’m not betting on it.

Unfortunately, the choppy and seemingly untrustworthy world of politics almost always has a bearing on the economy and financial markets.

See no colour

Stock markets don’t vote. And they tend not to care what colour rosettes the winners wear. In fact, you could easily waste plenty of time on Google trying to work out whether a blue or red administration will nudge the FTSE All share higher.

In any case, the two main parties have limited differences on fiscal policy. And every potential candidate for 11 Downing Street knows they must tackle low growth, low productivity, low living standards and an economy dallying with recession.

So, here’s something different.

Factors

At First Wealth we like evidence. We manage client money in accordance with the data.

And one data set is called factors. There are several different investment factors – markets often under-price good companies, shares that have gone up often continue to do so for a period. And so on. These two factors are called value and momentum.

If you bias your wealth towards these factors, you can boost its chances of growing.

Analysis by a technology firm called Confluence shows how each factor fares in the six-month periods before and after an election.

For example, if you have money in the ‘growth’ bucket you may have lost money before an election and may have made it faster afterwards. Value investments experience the opposite effect.

This shows me two things. First, people get jittery before a general election and more comfortable afterwards. So, perhaps unsurprisingly, growth companies fare poorly in uncertainty, better in certainty. People flock to value when they’re unsure and forget it when they’re surer.

Second, and perhaps this is the real lesson, almost every factor grew at some stage in this 12-month period. So, you want to be appropriately diversified across them.

And this is exactly what we do: we spread client money across evidence-based factors.

By the way, I’m not ignoring the ‘yield’ fly in the ointment above. It’s clearly not done well. But that’s a short-term anomaly. Research from the American investment firm Fidelity suggests biasing money towards shares with comparatively high dividend yields generated 1.98% of outperformance over the long run.

Fiscal drag

One other thing to think about is your tax liability.

In the UK we’re experiencing what experts call fiscal drag. When income, earnings and wages rise but your tax bands freeze still, more of your money is subject to tax. You’re dragged into paying more tax.

It’s often called a stealth tax, but the Office for Budget Responsibility talks about it all the time. Their latest assessment is worth quoting at length, because the numbers are remarkable:

“Between 2022-23 and 2028-29, this set of threshold freezes means nearly 4 million additional individuals will be expected to pay income tax, 3 million more will have moved to the higher rate, and 400,000 more onto the additional rate. This represents an increase in the number of taxpayers in each band of income tax – 11 per cent for the basic rate band, 68 per cent for the higher rate and 49 per cent for the additional rate. Relative to our March forecast, this is a respective increase in 2027-28 of 830,000, 900,000, and 43,000.”

Having mislaid our crystal ball, we can’t tell you what an incoming government will do with tax, but we can say that there’s never been a better time to think about your options.

These include:

• Making the most of your individual savings account allowances, for you and your family
• Topping up your pension
• Max out your capital gains tax allowance
• Consider venture capital trusts and / or enterprise investment schemes

We have an awful lot of experience in successfully guiding clients through the tax maze – as well as using things like factors to eke out as much performance for your wealth as possible.

If you’d like to know more, please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://www.bbc.co.uk/news/articles/c844x1xp05xo

[2] https://www.ons.gov.uk/peoplepopulationandcommunity/wellbeing/bulletins/trustingovernmentuk/2023#:~:text=A%20third%20(34%25)%20trusted,and%2012%25%20trusting%2C%20respectively.

[3] https://www.confluence.com/factor-performance-in-uk-general-elections/

[4] https://institutional.fidelity.com/app/proxy/content?literatureURL=/9861487.PDF

[5] https://obr.uk/site-search/

[6] https://obr.uk/box/fiscal-implications-of-personal-tax-threshold-freezes-and-reductions/

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.