There is no doubt about it. The mood in City banking circles about next week’s election outcome is glum.
And not just because investment bankers are tiring of the blanket coverage of Ed “two-kitchens” Miliband, boozy Nigel Farage and the “mean” Tory campaign, but because whatever the outcome, the environment for business, and mergers and acquisitions in particular, could become significantly tougher.
An outright Tory majority will likely mean a referendum on EU membership, which most people in the market expect could have serious repercussions for business and will raise the risk profile of investing in Britain.
We only have to look a few months back to see the uncertainty that was created by the Scottish referendum.
Fears of a Yes vote for Scottish independence prompted investors to pull £16.8bn out of the UK in the month before the referendum, the highest total since Lehman Brothers collapsed.
Zoopla even warned that more than £30,000 could be wiped off the average Scottish house price in the event of a split of the union.
Some bankers have told me that at a time when the country has grown weary of David Cameron’s “austerity” programme, they fear the election is “Labour’s to lose” – a thought which strikes horror into many City hearts on both a personal and business level.
Most bankers, especially the plethora who are raking in eye-watering bonuses, all dread an “Ed victory” because they will get clobbered with a 50p top rate of tax and a mansion tax. It will also mean the loss of cushy non-dom status for such deserving types as HSBC boss Stuart Gulliver, who has lived in Britain for more than a decade and educated his children here while avoiding UK tax on his foreign income.
Goldman Sachs’s concerns
Goldman Sachs is so concerned about a Labour victory that it warned two weeks ago in an election briefing note that a Miliband-led government could put small businesses at risk and would probably start a sell-off by investors.
The US investment bank pointed out the “leftward” leanings of Labour’s plans to freeze energy bills, raise taxes and curb zero-hour contracts as policies that would alarm investors. Not to mention Labour’s populist plan to raise taxes on the balance sheets of the UK’s biggest lenders.
Even though some British economists, such as James Meadway, have likened Goldman Sachs’s warning on Labour to “listening to Dracula on how to run a blood bank”, most agree that the importance of the election cannot be overstated.
The UK stock market may be packed to the rafters with global companies unlikely to get bogged down by a parochial election, but an unfavourable outcome for business could still jeopardise investors’ assessment of the risk of investing in Britain.
This is particularly true of overseas buyers, who not only drive M&A deal volumes but also boost the wider UK economy, as has been witnessed in UK real estate, which has been supported heavily by foreign investment since the crash.
Deloitte says that M&A deal values reached $39.7bn (£26bn) in the first quarter, off the back of foreign interest in a recovering UK economy and UK companies. This is the highest figure since 2008 and was up by 63% on the final quarter of last year following a surge in acquisitions from North American and Asian companies.
However, Intralinks, a company that provides virtual data rooms for companies conducting sales and can track “early stage” M&A, said although the UK deal pipeline was currently up by 10% on this time last year, it was still far more “subdued” than France and Germany. It said that UK dealmakers were taking a more cautious approach “until the future political direction of the country is decided”.
Fear of being hung
But the biggest fear of all is not, as you might think, a better-than-expected UKIP showing, but a political future of the country that won’t be one of Britons’ choosing. Instead, we could be left once again with a hung parliament and whatever coalition can be cobbled together.
This could mean a weak, unstable government reliant on minor parties, such as the jingoistic, radical Scottish National Party. And that is raising real concerns about how successful the next government will be in setting and pursuing its policy agenda.
Deirdre Hipwell, mergers & acquisitions correspondent, The Times
