News from the City

James Davies, Our Investment Research Manager, offers his fortnightly look at recent developments in London's major stockmarkets and economic indicators.

So, the Chancellor's Pre-Budget Report (or PBR as it's been called in the financial press) was announced this week. Essentially unless you're a bingo playing driver of a company owned electric car there won't be much to excite you. The PBR has all the hallmarks of an election budget, and it's an election the opinion polls currently suggest the Labour Party will lose. That the PBR also does nothing to address the budget deficit and selects the most optimistic figures for future growth, also strikes this writer as the equivalent of throwing a house party the night before you move out, in the hope that the new tenants will clean up the aftermath.

The 50% tax on ‘bankers bonuses' over £25,000 will assuage some public anger over the financial institutions deemed responsible for the mess. How much impact the bonus tax will have, however, remains unclear as ultra high earners (with income of over £150,000 per annum) will already be subject to 50% on income tax from April 2010. Having been best friends with The City for a decade the last couple of years have been awkward for the Labour Government. But no Government of any colour can afford to penalise the financial institutions of the City of London too heavily. Banking and financial services, as many have pointed out, are simply too important for the UK economy.

It is interesting to note the more combative tone coming from UK politicians over London's status as a global financial centre - until recently they (along with regulators) had been queuing up to publicly criticise London. The Financial Services Authority (the primary regulator) chairman Lord Adair Turner recently commented that the City was too big and aspects of it were socially useless - a bit like a prison governor complaining the inmates have it too easy. Perhaps it's the new French European Union Finance Minister that's spurred British policymakers into action? The fear that the continental Europeans might be trying to steal a march on London's pre-eminent position prompted many to take a swipe at the threat of over-regulation from Brussels.

In reality no other city in Europe can get close to London's dominant position. London sits betwixt America and Asia in the right time zone, has an unrivalled accompaniment of ancillary services (four of the six largest law firms in the world), a flexible labour market, is a source for high calibre graduates and English is the main language - no other city in Europe or the world has this. A bit of regulation when it comes to some areas of financial markets should be a priority not a concern - the bonus issue, however, is a complete sideshow.

James Davies - Investment Research Manager

Source: BBC Online, Newsweek, Prospect Magazine, Schroders