Shares in London's top listed wealth managers experienced sharp sell-offs on Tuesday morning as questions over Prime Minister Starmer's future caused government borrowing costs to surge. Investors have been on high alert since fears of a rebellion against Starmer emerged following last week's local election results, with the spike in gilt yields now triggering a sell-off.
Gilt Yields Surge
The ten-year yield rose over 11 basis points this morning to exceed 5.1 percent, while the 30-year gilt yield also spiked by more than ten basis points. This sharp rise triggered the fall in share prices, as over 70 MPs have called for Starmer's resignation, leaving his position as prime minister hanging in the balance. Wealth managers are particularly vulnerable to the market volatility that a resignation would cause, with gilt yields rising and the pound falling if a more left-leaning minister takes the top job, putting pressure on investment portfolios.
Share Price Tumble
St James's Place suffered a 2.6 percent fall, dropping to 1,175p, with shares down 17.4 percent year-to-date. Meanwhile, Quilter saw shares drop 2 percent, and FTSE 250 company Rathbones reported a 1.4 percent decline to 1,936p. Managers serving the mass market also saw declines, with AJ Bell dropping 1.3 percent and Aberdeen falling 1.6 percent, hurting their recent rallies driven by increased retail investment.
Chris Beauchamp, Chief Market Analyst UK at IG, commented: "There is no clear plan for what comes next, but markets are already pricing in a new PM who will open the floodgates on spending despite the UK's dangerous fiscal situation. A new PM will find it very hard to resist calls to spend more money in order to shore up their embattled party. Much of the case for the UK as an investment destination rested on the Starmer/Reeves commitment to fiscal rectitude, but it is unlikely that a new leader from the left of the party would feel bound by such promises."
Bond Market Turmoil
The bond market turmoil has also prompted a Schroders bond-fund manager to confirm that the firm is steering clear of UK debt and is unwilling to resume its previously bullish view on gilts. James Ringer said in an interview with Bloomberg: "We've seen this play before where the UK looks cheap and it only gets cheaper. We're happy to be on the sidelines."
Fragile Fiscal Position
Neil Wilson, investor strategist at Saxo UK, warned: "We could see a blowout in longer-dated gilts if this turns into a dogfight – political, fiscal and inflationary risks will rise. Markets tend to dislike a lack of certainty over who runs a government; the fiscal position is already fragile and likely to become worse should a left-leaning ticket prioritise spending, and that this makes inflation stickier."
His comments come as the Tribune Group, a group of 100 soft-left Labour MPs headed by former transport secretary Haigh, lobbies for a reset of the fiscal framework. Haigh said the UK's fiscal policy is "resolved in favour of caution" and added that Britain's "fiscal and institutional framework" is "unfit for purpose" as she called for major tax rises on wealth. This would leave wealth managers scrambling to align client needs with potential liabilities, such as a hike in capital gains tax and a potential restriction of tax relief on high earners.
