Is Starmer destined to be a Wally with the Brolly?

The budget has created angst for British farmers and costs for UK companies.

Love him or loathe him, Donald Trump is first and foremost a businessman – albeit some of his historic business practices have been open to question! Nevertheless, his goals to deregulate the US and lower corporate tax have struck a chord with investors and many voters. By comparison, in the UK, the Labour leadership does not appear to comprise of real business people. So, either they don’t understand the private and farming sectors or they don’t care.

The budget has created angst for British farmers and generated an avalanche of costs for UK companies. Chief Secretary to the Treasury Darren Jones recently said big businesses hit by the National Insurance increase should ‘suck it up.’ In the real world, businesses are trying to mitigate material budget cost increases, this will inevitably involve some price increases or cost reductions. Action by farmers could also lead to food shortages and higher food prices. Neither of these are good news for inflation!

Chancellor Rachel Reeves backed herself into a corner ahead of the budget, by saying there would be no increase on ‘working people’ with the ‘big three‘ taxes – income tax, VAT, or National Insurance. The budget pain fell on those with the broadest shoulders – UK businesses! She has since said, ‘We will never need to do another budget like this again.’ Is that tempting fate? It also transpires that she has been economical with her CV, having changed her employment history on LinkedIn while at the Bank of Scotland from ‘economist’ to ‘retail banking!’  

Pension reform                           

Last week, the Chancellor announced the ‘biggest pension reform in decades’ to boost UK economic growth. The government wants to merge the UK’s 86 local government pension scheme authorities into a handful of ‘pension megafunds’ with the scope to invest in infrastructure and renewables. She believes this could ‘unlock’ £80bn of investment in the UK economy. It sounds like a great idea – if the Australian and Canadian school teacher pension funds, she so admires can invest in long-term global infrastructure projects, then why can’t those in the UK? Yes, with greater scale comes bigger opportunities, but it can also come with risks. A prime example is the Ontario Municipal Employees Retirement system which is the largest investor in Thames Water – need we say more?

A new independent review process will be established to ensure each of the 86 administering authorities is fit for purpose. Currently, different administering authorities manage assets of between £300m and £30bn, with local government officials and councillors responsible for managing each fund.

Historically, council pension funds have been able to invest directly in big companies, but also smaller companies. These pension megafunds, by implication, are likely to invest in megacompany stocks and many of the smaller UK companies will be, unfortunately, less significant to them going forward.

Investing is a lot like football – it needs a decent manager and a motivated squad of players to get the results.

While Trump City is flying high at the top of the table, Kingdom United FC feels like it is currently languishing in the relegation zone. The best clubs always nurture younger homegrown players, the potential international stars of the future. The same should be true for UK smaller and mid-sized businesses – the potential business stars of tomorrow, which could now be overlooked by council pension funds with their potential new remit of global infrastructure projects.

It’s not a great start to the new season, as the UK economy contracted in September, due to budget ‘doom and gloom.’ Sir Keir Starmer may think that he talks a great game, but politics, as in football, is results driven and he risks becoming another ‘Wally with the Brolly.’ Will he keep his job until the end of the season?

 

What have we been watching?

 

US equities hit another record high as a Republican sweep was confirmed with control of the House of Representatives. The ‘Trump trade’ saw Bitcoin soar to $93,000. Trump has vowed to make the US the ‘crypto capital of the planet,’ obviously forgetting that he called Bitcoin a scam in 2021! Speaking of which, Trump and Musk did not see ‘eye to eye’ a few years ago but are now best mates. Musk has been rewarded for his support of Trump during the election by being appointed head of the new Department of Government Efficiency (DOGE) which is seeking to find government savings of $2trillion. Pure coincidence that Musk’s crypto-currency is DOGEcoin?  Since the election, Elon Musk’s Tesla has added over $300bn in value and the appreciation surpasses the combined value of car makers Ford, GM and Stellantis! Trump has also raised eyebrows with some of his key appointments, such as new Defence Secretary Pete Hegseth and new Secretary of State Marco Rubio, while the appointment of ‘anti-vaxxer’ Robert F. Kennedy Jr. as Health Secretary has cast a shadow over US and UK pharmaceutical companies.  

 

Meanwhile, Nvidia and other US AI chip makers were weaker on reports that the US had told TSMC to stop shipping advanced chips to China. Furthermore, while US equities have been rising, so has the 10-year Treasury yield, which touched 4.45%. The US dollar has also appreciated against most leading currencies and Sterling weakened to $1.26.     

The ‘Trump threat’ was reflected in the EU decision to change its spending policies to enable a significant increase in defence spending. The policy shift would see about a third of the bloc’s budget, some €392bn from 2021 to 2027, which, is aimed at reducing economic inequality between EU countries, spent on military kit instead. The biggest beneficiaries will be Italy, Poland, and Spain.

President Joe Biden announced a major shift in policy, giving Ukraine the green light for limited strikes against Russia with American long-range missiles. Putin has not made any comment so far but has previously warned he would view this as an escalation of the conflict. Will he sit tight and wait for Trump to take office?

While markets wait to see how Trump and Israel deal with Iran, the scale of the challenge to a lasting peace in the Middle East was reflected in the latest meeting of the Arab League and Organisation of Islamic Cooperation. This organisation that represents 57 Islamic nations said that a ’just and comprehensive peace in the region cannot be achieved without Israel ending the occupation of all Arab territories to those of 1967.’ Difficult to see Israel’s PM Benjamin Netanyahu accepting this as things currently stand.

Read our latest UK investment insights from Alpha PM

 

In the UK, the GDP data for the third quarter was disappointing with the economy contracting by 0.1% in September despite strong construction activity. Rachel Reeves is ‘not satisfied,’ but to be fair, ‘Sir Doom and Mrs Gloom’ were a big factor behind this. Neither can now claim the UK to be one of the fastest-growing economies!

 

In Europe, German political parties agreed to hold an early federal election on February 23rd, and Chancellor Scholtz will table a confidence vote on December 16th.

 

In the US, October inflation was in line with expectations with a monthly increase in CPI of 0.24%, albeit the fastest pace in six months, while core inflation was also a bit hotter than the Federal Reserve (Fed) would like at 0.28%. This, in combination with Fed Chair Jerome Powell noting that the US economy was ‘not sending any signals that we need to be in a hurry to lower rates,’ saw the chance of a December interest rate cut fall from 82% to 58%.     

Read our latest Chinese investment insights from Alpha PM

 

Chinese industrial production was up by 5.4% and retail sales were up by 4.8% in October. While encouraging, much depends on what new President Donald Trump will do regarding trade tariffs.

Read our latest investment insights from Alpha PM

 

Brent oil was steady around $71.

 

Finally, the law of unintended consequences and why renewable energy may face another hurdle. Sweden has blocked more than a dozen proposed offshore wind farms over concerns that the towers and rotating blades of the wind turbines could interfere with its missile detection systems. Given its proximity to Russia, Sweden is clearly taking its responsibility seriously as a new member of NATO to protect against threats in the Baltic Sea. Swedish climate activist Greta Thunberg will need to add Putin to her hate list alongside Donald Trump!

 

Read Last Week’s Alpha Bites – Europe’s Big Issue

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