Wait and see what the new Budget brings

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The Independent Online
The first indication I had that Thursday's general election might deliver a historic result was when my local Conservative agent called in at lunch-time on polling day with the morning's returns from the tellers. For South Suffolk's Tim Yeo to lose his seat would mean a disaster of unimaginable proportions for the Tories. Well, he held on, but the disaster for the Conservatives was pretty big none the less.

Will it be a disaster for the markets? Traders seem not to think so, although there was some inevitable profit-taking once the polls closed. This was not especially a judgement on the result. On Thursday night share prices in London closed at an all-time high, buoyed by an enthusiastic Wall Street. With America down on the day, there was every encouragement to sell: the surprise is that the reaction was not greater.

Many believe London share prices would have been even higher had it not been for the uncertainty created by the general election. Mr Blair can now do just about what he likes, but markets are betting that New Labour really does mean a new approach.

So where do we go from here? Probably the one area we should not worry about too much is the level of sterling. Selling did develop early yesterday in London as Far Eastern investors reacted to the scale of the victory. Next week, the new Chancellor will be meeting the Governor of the Bank of England. Opinion may be divided over whether interest rates should go up, but a rise next week must be on the cards. Getting it out of the way early may limit its effect on the market.

Utility shares, not surprisingly, have lost some friends. The windfall tax is a reality. And with such a large majority, perhaps the new administration will feel emboldened enough to pitch it at the top of the expected range. They will feel they have a mandate to introduce policies requiring funding - which is why all eyes will be on the first Labour Budget.

Where else will they raise money? The big threat to the stock market remains with tinkering with advanced corporation tax. Even though such a move has been widely debated, it is difficult to imagine a cut not having a knock-on effect on share values. Yet the stock market is facing the prospect with relative equanimity. We come back to the belief that a new era in British politics has dawned. If so, the relative health of the economy, the rising demand for financial assets and the beneficial effect of a buoyant Wall Street are all much more important than the change of government.

History certainly does not encourage us to believe that stock markets prosper under a Labour administration. While the Heath government, 1970- 1974, was hardly an investor's friend, the reality is that much more money has been made by investors during the Thatcher/Major years than when Wilson and Callaghan were in power. The market is saying that Tony Blair will not wish to upset the financial apple cart. Let us hope it is right.

Just at present it seems right to follow a policy of masterly inactivity. One thing is certain. Taxes are unlikely to go down for investors when the next Budget arrives. Waiting for the measures to be introduced means uncertainty that may produce volatility.

Once we know how precisely a Labour hand on the tiller will change things, we can assess which shares and stock market sectors will prosper and which should be avoided. Industries with a predominance of low-waged employees, such as catering and pub companies, look set to remain out of favour for a spell while the prospect of a national minimum wage is debated. As for the banks and financial services industry - expect tougher regulation.

My advice is to wait and watch. There is no reason to expect a major setback in the market, but equally why should the rise continue? It is worth ensuring that all your tax breaks have been dealt with, such as PEPs, in case contributions are capped. If you have money to invest, you will probably not come to much harm by waiting to see what the new Budget may hold. But in the end Bill Clinton, not Mr Blair may influence the course of British shares the most.

Brian Tora is chairman of the investment strategy committee at Greig Middleton & Co (0171 379 8071)

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