The FTSE 250 index rose as much as 1.5% on Thursday as the pound advanced
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 favourably, said Alberto Tocchio, a portfolio manager at Kairos Partners. The levy on companies is set to be lifted to 25% from 19% next year.
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.
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.
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.
