Investors are already finding out about the Labor landslide Britain

The FTSE 100 is at record highs. A constant stream of offers is pushing shares up. There is even a new float or two, and of course we are about to elect a new government, with a huge mandate, committed to “stability” and “investment”.

Surely investors should be rejoicing at the prospect, rushing to put money into UK companies.

Not exactly.

As the general election looms, and the outcome more certain, investors are pulling out of British equities. With rising taxes and more regulation, the UK is set to become a less profitable place to do business – and people are already pulling their money out.

After two decades of abysmal underperformance, the UK equity market is finally getting better. The FTSE 100 index is hitting all-time highs, and while it is still well behind the US and even German indices, that is an improvement.

In fact, according to analysis by Bloomberg, over the past three months the FTSE 100 and the FTSE 250 more broadly have outperformed the S&P 500, France’s CAC 40, Germany’s DAX, and Japan’s Topix index. A few big bids, such as the £34bn bid for Anglo-American from rival mining giant BHP, as well as better performance from some of the major oil and pharmaceutical companies, helped improve performance in the end.

When a market starts to rise, you would normally expect money to start pouring in. Everyone wants to change the trend. And yet, at the moment it is still exiting UK equities as quickly as possible. According to figures from the Investment Management Association, retail investors withdrew a net £1.3bn from British funds in April, the latest month for which figures are available. The best selling sector was “UK All Company”, with net outflows of almost £1bn.

British investors had money to put to work, with a net investment of £2.8bn for the month, but decided the UK was not the best place for it. Investors from the rest of the world are delivering a similar verdict. According to global funds network Calastone, there were £1.1bn outflows from UK-focused funds in May, the worst month for net sales since June 2022, and the second worst month since the start of the firm tracking the figures.

Sure, there may be plenty of explanations for that. Interest rates are falling in Europe, which could lead to better returns on the other side of the Channel. American tech stocks are still languishing, so returns are much more attractive, and Japan’s giant stock exchange is finally recovering from a 35-year bear market.

But the important point is this. It is hardly a vote of confidence in the Labor administration to be formed at the start of next month, or the commitment to “growth” that is its central promise.

Actually, it’s not hard to understand why. In the last few days, leaks have been emerging that shadow chancellor Rachel Reeves will raise capital gains tax, perhaps even equalizing it with income tax. For higher rate taxpayers, that would mean doubling the rate, from the current 20pc to at least 40pc, and 45pc for people on the top rate.

We already know that additional windfall taxes are on the way, especially on the already hard-hit businesses still developing oil and gas in the North Sea. But there could be additional “windfall” levies, with other banks following suit (perhaps by reducing the interest paid by the Bank of England on deposits they have to hold with it, and returning the profits to the Exchequer).

Indeed, Labor already seems to be of the view that any company that does some miraculous good is achieving “windfall” and is a legitimate target for additional levies. We will certainly see additional taxes on the private equity firms, with profits being reclassified as income instead of capital gains, and taxed at a much higher rate.

And of course we may see changes to corporation tax, with the generous reliefs introduced by Rishi Sunak to compensate, at least a little, for the increase from 19pc to 25pc, again limited.

It doesn’t stop there. While we are still awaiting the final version of the party’s manifesto, a massive extension of employment rights will certainly be included. It is likely that workers will be offered full legal protection from the first moment they start, contracts will sometimes be limited to zero even if they manage to prevent a complete ban, and versions of such trendy “wellness” could to cover according to the law, the empowerment of the burdens awakened human resources to further increase their power.

The UK’s flexible labor market, one of our main advantages over our competitors since the 1980s, will finally end.

Meanwhile, the pension funds that might have started investing in British equity again could be funneled into “green infrastructure” instead, regardless of whether it can make any profit, cash that flowed out of the stock market.

Add all that up, and one point is clear: the UK is going to be a much tougher place to make money in the next five years. Labor talks about “growth” as if no one has thought of it before, but every concrete policy it proposes is likely to slow the economy even further.

The blunt truth is this: the UK faces five years of stagnation, stuck in a zero-growth doom loop, rising taxes, and floundering public services. The returns will be terrible.

The actual election will not be for another four weeks. But investors have already voted with their wallets, and deliver a damning verdict. They are coming off a Labor landslide in Britain – and it’s very hard to blame them.

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