Nervousness has gripped the City over the past month. A vacuum of fiscal policy has been filled by speculation and companies are scrambling to draw up plans ahead of a potentially punitive tax-raiding Budget from Keir Starmer and Rachel Reeves.
Among the most gloomy warnings have been an inadvertent gutting of London’s junior AIM market as a result of inheritance tax tweaks and the erosion of Britain’s standing as a place to set up companies through changes to the capital gains tax regime.
Expected changes to national insurance, which could see employers charged on contributions to their employees’ pension pots, are also likely saddle business with another hefty bill.
But, there will be winners too in the City. Analysts at investment bank, Investec, have tried to cut through the rumour and suss out which firms will be punching the air come Thursday – and which will be licking their wounds.
Who will be the Budget winners?
Brooks Macdonald is Investec’s best bet as a Budget winner in the financial sector, as the investment bank expects the underperformance of financial planners to finally reverse following the fiscal event.
However, the complicated and varied tax changes expected to roll out during next week’s Budget might cause a drag on companies that benefit from more being invested in the stock market, Investec analysts Jens Ehrenberg and Rahim Karim warned.
The targeting of private pensions, such as through cutting the max lump sum withdrawal rate or hiking taxes of employer national insurance payments to pension pots, would be likely to cause a spike in withdrawals and a drop in contributions for the financial industry.
“In this context, we note that AJ Bell and Quilter have the largest exposure to pension assets,” they said.
Around 70 per cent of AJ Bell’s assets under management are pension assets, the analysts estimated, with Quilter’s sitting at around 50 per cent.
While asset managers do not track whether their investments come from pensions or not, the Investec analysts noted that those with higher proportions of direct retail investors, like Jupiter, Liontrust and Premier Miton, would likely be most hit by the changes.
Dips in asset under management would then translate to a loss of fees, hurting the revenues of these firms.
The City is also anticipating changes in capital gains tax in the Budget, to push the rate from between 20 to 28 per cent to as high as 39 per cent, which would likely hit how much higher income earners invest.
Whether the problem persists in the long term would likely depend on the size of the increase, the Investec analysts said, as well as whether there are any asset classes which are exempt from the changes.
However, they pointed to Rathbones as being most at risk from a capital gains tax, thanks to their higher proportion of high net worth clients.
Could the Budget hurt AIM exposed firms?
Another rumoured change in the Budget is the imposition of inheritance tax on AIM stocks. While the largest financial companies rarely run inheritance tax-focused AIM funds, Brooks Macdonald has the largest, with an estimated 1.2 per cent of its assets in inheritance tax funds.
Instead, the Investec analysts saw greater changes coming to companies that invest in AIM stocks as a whole, given that Peel Hunt has estimated the changes could cause as much as a 30 per cent drop in the junior market’s stock prices.
“Given their exposure to UK equity markets, and smaller companies in particular, we anticipate this change as being most significant for Liontrust and Premier Miton,” said the analysts.
AIM-listed financial companies, such as Impax and Premier Miton, would also likely see a dip in their share price.
However, the analysts stressed that while the companies might take a short-term hit from the withdrawal of cash from AIM, the move would not have any impact on the underlying strength of the businesses, like profit and revenue growth, leaving “an attractive opportunity” to buy their shares in the aftermath.
“On the basis that any negative move represents technical factors rather than fundamentals, any large share price reactions could provide an attractive entry point for long-term investors,” they added.
Why some firms are set to win from the Budget
“Whilst many of the discussed changes will likely create headwinds for the industry, the offset to this should be an increase in demand for financial advice,” the analysts said.
As the tax regime shifts, savers will be more likely to consult financial planners to better invest their portfolios.
Brooks Macdonald was selected as most likely to benefit from this, as its acquisitions of Lift and Lucas Fettes this year increased its financial planning expertise, with an estimated 17 per cent of its revenue now coming from financial planning.
Meanwhile, Quilter has the second largest network of financial planners in the UK, with 1,369 restricted planners meaning that an estimated 14 per cent of its revenue currently comes from financial advice.
Rathbones was also selected as a potential benefactor of the changes, with nine per cent of its revenue coming from financial planning after its acquisition of Saunderson House.
“This dynamic highlights the value that financial planning offers to both clients and corporates, and supports the actions taken by a number of wealth managers to increase their exposure to this theme in recent years, and expect further M&A to help accrete this,” the analysts concluded.