How Rachel Reeves promotes Britain as a safe haven for global money

Labour’s drive to make the UK an “island” of stability seems to have been perfectly timed.

Rachel Reeves is promoting Britain as an investment destination that has recently become more stable.

The new Chancellor will encourage international business to “take a second look at Britain” at the G20 in Brazil. She will declare that “after years of uncertainty and insecurity, Britain is now open for business again”.

Investors are grabbing up gilts (also known as UK Government Bonds) in a bid to confirm the consensus on financial markets.

This not only signals a renewed faith in British assets but also lowers the borrowing costs for the Chancellor.

The UK pays less for borrowing from global investors than it did a year ago. This is in contrast to peers such as France, Germany, and the US.

Any government would be able to draw a comparison with the Liz Truss period, when the bond market collapsed and Britain’s debt was said to have a “moron-premium”.

Reeves, however, has worked hard to build a reputation as a prudent politician. She defies those within her own party that want to increase public spending and instead focuses on strict borrowing rules.

Michael Saunders is a former Bank of England official now at Oxford Economics. He believes that if she could convince the markets of her plans’ rationality, especially if these are accompanied with painful tax increases, then borrowing costs would fall even further.

He says that a fiscal shift of this kind would be a better way to comply with fiscal rules. It would probably help lower bond rates and market expectations.

In turn, lower yields on bonds could result in a windfall for lower debt service costs.

Chris Sanger, global tax policy leader at EY, said that the UK has benefited from the “clear principles and policies” laid out by Labour before the elections.

The government has made clear statements about its desire to attract investments, as well as a commitment to not raise tax rates on income tax, National Insurance and corporation tax.

To its advantage, Labor has come to power at a time when other nations are looking shaky.

It is a perfect example of the fierce competition on the financial markets, where a nation does not have to appear stable. Just less unstable than its neighboring country will do.

France provided the perfect backdrop, as Emmanuel Macron’s general election created immediate volatility.

Germany’s government is still rife with financial disputes, despite being less indebted that France. This undermines the economy.

Under Joe Biden the US also went on a debt binge, and this is likely to continue whether Donald Trump or Kamalah Harris win the November presidential elections.

Tim Sarson, KPMG UK’s head of tax policy says that the instability in Europe has been a benefit to Britain. He also believes the uncertainty about and what a second Trump administration could mean for, the world’s largest economy.

He says that the UK is no longer seen as Europe’s sick man. It’s seen as an understandable, stable place to be. This has led to increased trust.

“Talking with Europeans, there is a feeling that European politics may be heading in the wrong directions and that the UK could be returning to its former liberal-friendly status.”

Sarson says that French elections for the French parliament last month caused fear among high rollers. Many of them feared a victory by the hard Right.

Some people have told me that they might jump into one of the small boats to cross the Channel next weekend if Marine Le Pen is elected.

The currency markets reflect this. Recently, the pound reached its highest level against the euro in two years and against the dollar in one year.

It is not just a political issue, as other factors are also involved, like the plans of each central bank to reduce interest rates.

Shahab Jalinoos is an analyst with UBS. He said last month that Britain could emerge as a “island for stability”. Now, he says there are “some green sprouts” showing.

He says that “investment in the UK was weak for a very long time – during the entire post-Brexit period. Policy uncertainty is a major issue.”

“A stable government that has policies set up which are reasonable and reliable from a business standpoint should help companies feel more confident about their investments.”

There is also the broader economic outlook.

Reeves & Sir Keir starmer were fortunate to have taken over at the right time. They benefited from the drop in inflation, which has now fallen to just 2 %, the apparent acceleration of GDP growth, and the burgeoning confidence in business.

S&P Global’s influential survey of companies, the purchasing managers indexes (PMI), shows that Britain is growing faster than France or Germany.

Since the UK election, new orders have increased significantly. Contracts that were paused prior to the election are now signed and the expectations of future demand are close to two-year highs.

Bank of America’s global fund managers survey confirms the growing movement of money from the eurozone to the UK. More “real economy” companies are also making similar decisions.

Reeves’ efforts will not change the fact that investors still flock to Britain because of its relative attractiveness.

Sarson claims that American clients are especially wary of any Labour Government that introduces higher taxes.

A top executive from a global company says that many international investors are going to look for clues this fall in Reeves’ first Budget: “That first Budget will be critical.” If there are many unexpected tax increases in this budget, it will affect the appetite for investment by businesses.

Patrick Thomson, European Chief Executive of JP Morgan Asset Management warns that Labour should be cautious not to increase redtape.

He says that “regulation must be proportionate.” “We have a strong reputation in the area of regulation.”

“But it is important to strike a balance between protecting investors and ensuring that there aren’t too many regulations.”

James Athey, fund manager at Marlborough agrees there are good reasons to be cautious when it comes to UK government debt.

“Fiscal policy is still uncertain.” He says that a UK government with a majority of this size looks stable compared to the change of prime ministers every week under the previous government.

It is hard to say whether this should encourage you to purchase gilts while there are still these more left-leaning Chancellors and Prime Ministers in place.

He cites, however, the American expression that investors seek “the cleanest dirty shirt”, as the reason why investors back Britain.

He says: “Try finding a G10 government that has been fiscally accountable – there are none.”

The UK is not as bad on many metrics.

Reeves may not need to invest much more.