Should investors trust in Truss?

Have you ever had a first day at a new job with absolutely nothing to do?

“One of the tech support guys will be up in a minute,” says his manager with a welcoming smile. “They will put you in the email and the other services.”

He then disappears into a three-hour meeting.

There are no signs of the type of technical support. Cannot get past screensaver login.

The minute hand on the office clock ticks slowly.

Is 12:00 too early for lunch?

Liz Truss’s first day at the office was surely nothing like that.

action stations

Rarely, outside of war, has a new Prime Minister been faced with such an imposing inbox marked “Urgent”.

In fact, our latest leader doesn’t even have peace on her side. Britain is an ardent supporter of Ukraine against Russia, after all.

Russian aggression is also behind the energy crisis which must be Truss’s first order of business.

Civil servants, MPs and lobbyists will also be pulling up your sleeve for action to resolve Northern Ireland’s post-Brexit impasse, wider cost of living crisis, action on climate change after a summer exceptionally dry, oh, and he will have to rehabilitate the reputation of politics after the scandals that brought down his predecessor and gave him the opportunity.

Not to mention that the NHS appears to be one last Covid wave away from collapse.

It’s quite a to-do list. The priorities of everyday investors like you and me will not be at the forefront.

However, investing is what we do at the motley fool. And long-term saving and investing are vital if we all want to live our best lives without becoming a burden on the state.

So what would we pressure the new Prime Minister to go ahead with?

energetic action

Tackling the energy crisis has rightly been the top priority for the new administration, with a series of new measures announced on Thursday.

The energy regulator, Ofgem, had set a maximum price for October at £3,549, an increase of 80% in six months. Experts were quick to predict ever-higher charges, and a recent forecast would have capped it at £6,552 in April 2023, before Thursday’s announcements.

Such bills would have brought many homes to a standstill.

Less reported has been the impact on business. Prices here have not previously been capped at all.

Smaller FTSE 350 and AIM companies in the hospitality and manufacturing sectors (low-margin at best) could have been crushed by skyrocketing energy costs.

The consequences would have spread throughout the economy.

Investors therefore have every reason to applaud the action on energy prices, not just as bill payers.

Of course, there will be a price to government intervention. Higher taxes now or in the future.

But it’s really a matter of choosing your poison. Not acting was not an option.

hitting the table

Government action on the energy crisis piles more pressure on our brittle public finances.

At last count, UK public sector debt stood at £2.348 trillion, or 96% of GDP.

The highest level since the 1960s.

In addition, the UK has a record current account deficit of 7% to 8% of GDP.

This difference between the level of UK exports and imports is financed by foreign capital: the “kindness of strangers” as former Bank of England Governor Mark Carney once put it, or else perhaps by the IMF, as Britain saw it in the 1970s.

The UK has the highest inflation rate among the G10 nations. Productivity gains are stagnant.

Meanwhile, the Bank of England is predicting an impending recession, even as it raises interest rates.

Higher interest rates, in turn, increase the cost of servicing public debt.

All wrong! But still not a reason to panic.

UK government loans have a long maturity profile. We will not have problems meeting our obligations in the short term.

But investors must hope that Truss can retain the confidence of international capital. Campaign talk about reviewing the Bank of England mandate, for example, should get in touch.

The pound’s weakness is partly an indicator of investor uncertainty. A pound now buys just $1.15. Some City analysts believe we are headed for parity with the US dollar.

This weakness makes imports (including energy) more expensive and fuels inflation.

British money buys less on the global stage. It is not something that investors should encourage.

tax issues

Another of Liz Truss’s campaign promises was to reverse former Foreign Minister Rishi Sunak’s planned corporate tax hike.

Leaving aside the question of financing the reversal, this would be good news for UK companies.

A simple price-earnings ratio tells us that companies that retain more of their earnings are more valuable.

And paying less taxes leaves more cash to reinvest, raise wages, reduce debt or pay dividends.

A lower corporate tax regime could also attract such foreign investment.

Truss also pledged to reverse this year’s 1.25% National Insurance increase.

There are even aspirational rumors about the reduction of the income tax.

Tax cuts put more money in people’s pockets, and give us more money to invest, of course, but unless the cuts boost growth, they will also put further pressure on UK public finances.

Personally, I would prefer a pro-growth agenda focused on innovation and the tech companies of tomorrow.

Fools know that investing extensively in the tech sector today means putting money to work abroad. National opportunities above the micro-cap scale can be counted on the fingers of one hand.

An expanding UK tech sector could be good for our returns, as well as for Great Britain PLC.

Will allow me

One area that no politician talks much about these days is savings allocations for ISAs and pensions, including the lifetime allowance for pensions.

That is understandable. Over the last few years, Britain has gone from one thing to another. SAIs, for example, were born and promoted in more prosperous times.

However, the fact is that the ISA’s annual allowance has been frozen at £20,000 since 2017.

The annual allowance for tax relief on pension savings has been £40,000 since 2014.

The lifetime pension allowance has been equal to or greater than £1 million since 2016. In 2012 it was £1.8 million!

These may seem like generous allowances in the midst of a cost-of-living crisis.

But by freezing them, their attractions atrophy, even faster with double-digit inflation.

Increasing these allocations will not be a priority. But for investors, there is no surer boost to our long-term returns than protecting them from the ravages of taxes.

she has mail

Lastly, Truss has pledged to scrap EU regulations in light of Brexit.

However, I would wonder if there is a lot of red tape to throw at the stake when it comes to financial regulation. Not if we want to protect consumers and investors.

Any Radio 4 listener Money box knows that there are enough dodgy teams to warrant even tighter regulation.

That said, I was pleased that the Financial Conduct Authority made changes to the EU’s Key Information Document (KID) rules. The disclosures required by the EU often shed more confusion than light.

The FCA is now undertaking a broader review. And perhaps there are other ways in which UK regulation can better suit the UK’s more self-directed investment environment.

But I would put financial stability at the top of my investor wish list, followed by higher savings allocations. Let’s just hope Prime Minister Truss has set up email and is on the case!

Leave a Comment