Rebuilding Britain

Over the last decade, but noticeably since Brexit, global asset allocators and investors have progressively moved funds out of UK equites and switched into global markets, particularly into the US. This trend has also been driven by the growth of passive investing, the performance of the ‘Mag 7’ and AI.

However, could there be light at the end of the tunnel?

Trump’s Liberation Day tariffs have forced asset allocators to re-think global diversification. At the same time, the UK government has been seeking ways to boost economic growth by encouraging greater investment in the UK. Having dented business confidence with the National Insurance tax hike and damaging AIM by cutting IHT relief, Chancellor Rachel Reeves has sought to make amends by seeking ways to boost demand for UK equites.

Reeves is currently undertaking a review of the ISA market and while the £20,000 ISA allowance is expected to remain, the cash ISA may be altered to encourage savers to funnel more of their cash into stocks and shares ISAs. However, given equity investing involves greater risk than holding cash, would cash ISA holders be comfortable investing in equities and specifically UK equities?

A more supportive development for the UK could be the ‘Mansion House Accord’ which has been agreed with seventeen major pension providers including Aviva, M&G and Royal London. This is a voluntary, non-binding agreement by the workplace pension providers, under which they have agreed to allocate at least 10% of all defined contribution (DC) funds into private markets by 2030, of which 5% will go to the UK.

The Accord is aimed at securing better financial outcomes for DC savers through the higher potential net returns available in private markets, as well as boosting investment in the UK. Based upon providers’ current investment holdings, total pension assets in the scope of the agreement amount to at least £250 billion. The accord will release up to £50bn of funds, with half to be allocated to UK assets.

Investment in assets such as infrastructure, transportation, housing, venture capital and private markets can play an important role in improving risk-adjusted returns for members of pension schemes, while also contributing to UK economic growth. However, potential higher returns usually involve a greater risk and pension funds will be mindful of fiduciary and Consumer Duty requirements. Another important factor is liquidity, the UK investments are also dependent on “a sufficient supply of suitable investible assets”. Will there be investment opportunities in the UK of sufficient quality and scale available?

It is also worth noting that the Mansion House Accord could benefit the AIM market, given that that AIM shares are also included within the potential investment universe.

Whatever the outcome of the ISA review or the Mansion House Accord, anything which encourages greater investment in UK equities must be good news for the UK stock market in the long-run.

What have we been watching?

The recent equity market rally stalled as global bond markets came under pressure. The 30-year US Treasury yield moved above 5% and within a whisker of its highest level since 2007, triggered by Trumps “Big Beautiful Bill” narrowly passed in the House of Representatives – by just one vote! The bill proposes to extend the tax cuts from his first term and raise the debt ceiling by an eye watering $4tn taking debt as a percentage of GDP from 98% to 125% over the next 10 years. Higher US bond yields dragged European sovereign bond yields higher and for the UK there was the additional pain of higher-than-expected inflation and government borrowing in April. The 10-year UK Gilt yield climbed above 4.8%. Against this background, markets also had to contend with the release of the latest ‘flash’ PMI business activity indicators for May. For example, the European PMI services reading dropped into contraction territory at 49.5 -a six months low.

Equity markets were also reminded of trade tensions after Trump threatened to impose a 50% tariff on the EU starting as soon as June 1^st. However, the deadline was once again delayed over the weekend—pushed back to the original July 9th date—following a positive call between Trump and European Commission President von der Leyen. Geopolitical events were not encouraging either with no sign of an end to fighting in Ukraine despite Trump saying that Russia and Ukraine will ’immediately’ start negotiating towards a ceasefire. Meanwhile, Israel’s war in Gaza has entered a new, violent phase which has drawn a backlash from the UK, France, and Canada. There were also media reports that Israel was considering a strike against Iran’s nuclear facilities.

The UK-EU summit reset last week should begin a slow healing process. It marks the beginning of a process of closer co-operation, covering areas including defence, energy and a partial Brexit reset. Significant scope exists for further progress over time, but political obstacles remain and the government has indicated no single market or customs union re-entry.

The limited scope brings only a small expected boost to UK GDP over the next decade – just 0.2% according to the government. Meanwhile, media reports suggested that the EU has shared a revised trade proposal with the US, which includes steps such as gradually reducing tariffs to zero on non-sensitive agricultural products and industrial goods.

Another bad week for Chancellor Rachel Reeves who it was reported had come under attack earlier in the year from Angela Reyner while Sir Kier Starmer announced a U-turn on winter fuel payments. To add to her woes, inflation was higher than expected in April with CPI at 3.5% while core inflation rose to 3.8%. This led investors to lower their expectations for further interest rate cuts from the Bank of England. Then, public sector finance for April made for disappointing reading. Despite higher National Insurance Contributions, the government recorded a much higher than expected deficit in April of £20.2bn. UK flash May PMIs showed services at 50.2 (up from 49.0), which is encouraging to see back above 50, even if only marginally, as services represent around 80% of the UK economy. The Eurozone cut its economic growth forecast for the region for 2025 from 1.3% to 0.9% due to weakening global trade outlook and higher trade policy uncertainty. The European ‘flash’ PMI business activity indicator for May showed the service sector moving into contraction territory with a reading of 49.5.

Brent oil held around $64 despite media reports that US intelligence believe that Israel is preparing a strike on Iranian nuclear facilities.

Finally, domestic energy prices are forecast to fall in July with the UK Energy Price Cap set to fall by 7% for Q3- the first drop in regulator Ofgem’s price cap for a year and a positive for CPI. However, the EU faces a €10bn bill to refill gas storage after a cold winter and European gas prices are likely to rise in the summer as countries rush to meet the EU’s storage target. Meanwhile, Centrica -which owns British Gas – has warned it may be forced to close its loss-making Rough gas storage facility without government support. Centrica is seeking a ‘cap and floor’ pricing mechanism from the government that would allow investment in the facility. The UK has amongst the smallest amount of gas storage of any major European countries.

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Rebuilding Britain

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