The FTSE 100 could see most or all of its gains this year reverse course. Major oil and gas companies, as well as banks are in new Chancellor Rachel Reeves’ crosshairs, as she attempts to raise funds to cover the £22bn “black hole” in the country’s finances.
The Chancellor could now be eyeing up a potential windfall tax on these corporations despite saying before the general election that there were no such plans to do so.
If Reeves does decide to instil a windfall tax, it could have severe ramifications on Britain’s premier index. Heavyweights like Shell, BP, and HSBC make up the top five constituents of the FTSE 100. Altogether, the three constitute almost a fifth of the FTSE 100’s weighting (18.9%) – meaning that any significant movement in their share prices could sway the benchmark greatly.
Gabriel McKeown, Head of Macroeconomics at Sad Rabbit Investments said: “As Chancellor Reeves sharpens her fiscal scalpel, the UK investment market braces itself for the impending prognosis. The introduction of windfall taxes on energy and banking sectors could be a double-edged sword for the UK’s investment prospects. Despite the opportunity for these taxes to address fiscal shortfalls, the long-term impact on the UK investment market and the broader economy could be disastrous.”
For banks, doubling the existing levy on liabilities could push them to reconsider their commitment to the UK market, diminishing the UK’s stature as a global financial hub.
Furthermore, with the FTSE 100 heavily weighted towards energy and banking, any negative impact on these sectors could cast a shadow over the UK’s appeal on the global investment stage.
As the UK government tightens its fiscal belt, it could be about to strangle its investment golden goose. Instead, it must carefully balance the immediate budgetary needs with the potential long-term economic consequences.
John Choong, Head of Equities and Markets at Investors Edge said he felt tax hikes could cause foreign investors to shy away from the UK:
“As the FTSE 100 grapples with equity outflows, delistings, and takeovers, Reeves’ proposed windfall taxes threaten to exacerbate its woes,” he explained. “With foreign investment already near a 12-year nadir, this “windfall” might prove a pyrrhic victory, and sets a dangerous precedent for further tax hikes. The likely decline in oil, gas, and banking stocks that are FTSE stalwarts, could leave a void other sectors struggle to fill.”
Choong said that healthcare, another heavyweight, offers limited upside, with AstraZeneca already trading at a lofty forward P/E of 29. Meanwhile, global manufacturing headwinds constrain industrials and miners to trade higher.
“Reeves’ tax raid risks clamping down on economic growth which could potentially decrease the perceived equity risk premium and trigger further UK equity outflows,” Choong said. “Thus, in this high-stakes game of economic Jenga, Reeves must tread carefully. One wrong move could send the whole tower tumbling, with a potential repeat of the infamous 2022 mini-budget.”
