Fraser Kerr, Regional Director, hosts Lizzy Galbraith, Political Economist and Victoria Scholar, Head of Investments at interactive investor to discuss the political and economic landscape and how this could have an impact on you and your finances. 


Fraser Kerr: Thanks for joining us for episode three of Wealth Wise, the financial planning podcast launched by abrdn Financial Planning. My name is Fraser Kerr, the Director for Scotland, and I'll be your host.

Fraser Kerr: What we're looking to cover today is the political party conferences - crucially, these are going to be the last before the general election - and what these could potentially mean; the political landscape just now being one of change, uncertainty and unknowns, and how it could actually impact you as individual investors; and then the overarching importance of your financial plan, how speaking and actively engaging with your financial planner can provide real peace of mind, reassurance and clarity at a time of great change and unknowns. As always, if anyone has any questions or wants to find out some additional information, or just wants to have a conversation about anything that we've covered off, contact us directly at the Wealth Wise mailbox. That's and we'll be sure to get back to you.

And I'm privileged to be joined, again, by the very talented Lizzy Galbraith here in Edinburgh. Lizzie, thanks for joining us today.

Lizzy Galbraith: Thanks for having me back. Fraser.

Fraser Kerr: Lizzy is our first repeat guest, so we all know that's incredibly positive that we've not scared her off too much. Victoria, on the other hand, did not want to be in the room with us today so is actually joining us from London.

Victoria Scholar is the Head of Investments at interactive investor. And it's great to have you along here today, speaking with us.

Victoria Scholar: Oh, thank you so much for having me on.

Fraser Kerr: I mean, I suppose, Lizzy, since you were last on you highlighted uncertainty, unknowns, a lot of instability. And I think really, that has just continued in an incredible vein since then, hasn't it?

Lizzy Galbraith: Yeah, certainly. We've, you know, we've seen conflicts spring up in the Middle East, we've seen the UK domestic political environment continue to be quite volatile as well. So, since we last spoke, we've seen the party conference season been and gone. Very interesting conference season this year. It should have been quite a big deal, as these are likely to be the last party conferences before the next general election. So, they're used as a reason to rally the party together to try and get everybody excited and motivated about the vision that those party leaders have for the country.

And I'd say Labour just about managed to do that this time around. The Conservatives, maybe slightly less. So, you had Liz Truss stealing a lot of the limelight from Rishi Sunak. You had Nigel Farage turning up as well. Definitely a lot more conversation at the Conservative Party conference about the ideological direction that the Conservatives should be taking, a lot more open conversation about whether the current approach is the right one. Whereas Labour managed to stay broadly on message for the Labour Party conference itself and have since actually started to struggle with some cracks, as we've seen the war in the Middle East start to take a toll on cabinet unity.

Fraser Kerr: Yeah, you really do see that, because I think that such a big success story for the Labour Party Conference was how unified they came across. And it was that one vision, the shared purpose, the common goal, and after, you know, the last decade, it did seem like a party, that had really turned the corner and was ready to take advantage of potentially progressing into government. But you know, that seems almost a distant memory now, that six weeks ago, based on where we are and what's going on, and just seems to be fractures creeping in. And again, a little bit of a divide there. It just seems to be one thing after another with them as well.

Lizzy Galbraith: Yeah, there's certainly a lot of strain on Keir Starmer’s position on this at the moment. But I think it's also worth bearing in mind that it's not actually resulting in any movement in the polls. So yes, this is a very high-profile issue at the moment. Yes, it's causing a lot of strain among the party membership at the moment. But it doesn't actually seem to be something that voters are really picking up on, and sort of changing their views of the parties on. So, while this is a very big issue for Labour internally, and it's very emblematic of the fact that Labour is a very broad church, there are a lot of views in that party, particularly on things like foreign policy. And Labour is going to struggle to keep all of that together, should they get into office. So, it's emblematic of that struggle that they will have if they get into government, that you are going to see the party pulled in different directions on some of these issues. But it's also not going to be a really significant factor going into the next general election. There's not much evidence to say that this is something the public are really paying attention to, beyond quite a small group of people.

Fraser Kerr: And I think with that as well, Victoria, what that then translates to, obviously on the investment side is, the more uncertainty, the more these unknowns that Lizzy's alluded to, you know, even the upcoming general election, all of that just sort of lends itself to an investment environment that can just be very volatile for our clients, very volatile for investors. And it's a particularly challenging time across the piece, isn't it?

Victoria Scholar: Yeah, I think you're right. And the UK has underperformed other indices globally, like the DAX in Germany and the S&P 500 in the US, in recent years. There's been sort of international investor uncertainty when it comes to the UK in a post Brexit world. And now, of course, we've got a lot of political uncertainty going into the general election next year. And on top of that, there's the shaky economic backdrop to deal with sluggish economic growth and the potential for a shallow recession next year.

Fraser Kerr: And do you think that, with regards to that underperformance of the UK against its peers, do you think that represents an opportunity in terms of it’s a potential sector that could see growth? Or do you think the potential for recession beyond the horizon and that that's actually more of a negative and investor sentiment is really poor there?

Victoria Scholar: Well, I think that in terms of UK PLC, there are some fantastic valuations on offer. There are some amazing companies to pick from but it's really a stock pickers market, rather than a time for index buying. We've seen that the FTSE100 is down so far this year compared to a gain for example for the S&P500 stateside year to date. And it really depends on what type of investor you are. Because for income investors, for example, there are some fantastic yields on offer on the FTSE 100, offering some pretty strong dividends. And then we've also seen some fantastic individual winners this year. But of course, it does feel as though it's a time to be discerning with bond yields where they are much higher than pre COVID when interest rates were at rock bottom, and so that risk reward for getting into equities is a lot less attractive, particularly when you combine that with the macroeconomic headwinds.

Fraser Kerr: Yeah, that's definitely something we're seeing on the financial planning side. And I suppose first and foremost that kind of summarises why such a well-diversified balanced portfolio that's aligned to an individual's risk tolerance is so essential in being able to navigate the sort of markets and headwinds, but also definitely on the interest rate side of things recently, the NSNI were offering 6.2% returns. And I mean, that’s really seen a flood of interest and people migrating towards there as well. And I suppose, Lizzy, interest rates are something that we've touched on before, and I think the general sentiment seems to be sort of a consistency now with where we are. So not the same hikes that we've seen in the past, but more of a stable approach. I mean, that undoubtedly impacts markets as well, doesn't it?

Lizzy Galbraith: Yeah. So, our expectation now is that we think the Bank of England is going to be on hold for a while we're not expecting any more rate rises to come through from the Bank of England, unless we see some surprises in the data that mean, they need to take further action. But I think that that is now going to mean that we start to see the rate rises that have come to pass really start to, to bite across the UK economy, that's going to mean, you know, more rate rises for mortgage holders as well. So, we're going to see, you know, the public start to notice you, they're going to start feeling the effects of, of these interest rate rises on their monthly bills.

Fraser Kerr: I think, in real terms, people’s purse strings tightening – it just goes to show where we are with financial planning, that intersection between what you're talking about Lizzy, the investment markets that you're talking about Victoria, but actually the impact on the individual, what is unique to them, what's specific to them, and it is looking at those, those challenges and those constraints that we're coming up against. And it's not like we're coming from a period of significant growth for the last few years, you know, we have had challenges because of uncertainties for an extended period of time now. Victoria with regards to those interest rates, do you think that that could conversely, see people potentially increase their risk and actually look to chase more significant gains because of that risk return they’re getting with cash? Do you think that could maybe see people be more adventurous elsewhere? Or maybe adopt more aggressive strategies as well with investments?

Victoria Scholar: Yeah, possibly. Because obviously, with inflation where it is, it's more difficult to make a return, say, above five or 10% now than it was when inflation was much lower. I think that one of the things I've been asked a lot has been about, why should I be investing now, when there are such great savings rates out there? And really, our answer to that is that if you look at returns on cash, versus sort of average returns in the market over the long term, investing tends to outperform. So, we take the view that investing is very much a long-term game, we know that timing the market top and the bottom is extremely difficult. Regular investing is also a great way to smooth out the market's natural gyrations and save you the pain of having to try and time the market. And of course, over time, you get the benefit of compounding as well. So, if you reinvest your dividends, then that can help to boost returns too. So, trying to take an appropriate risk approach and seeing your investment strategy as for the long term, and trying to not get caught up in the day-to-day market noise, because that is one of the pitfalls that we see time and time again. Also, I think being overly exposed to one company or one geography. So, trying to maintain a globally diversified portfolio, possibly with funds, not just single stocks to give you greater exposure to a wide variety of companies. All of this can help to give you the best chance of enjoying long term strong returns.  

Fraser Kerr: Yeah, absolutely. This is where I get to do my Warren Buffett, Oracle of Omaha quote, “time spent in the market not trying to time the market” That's the Oracle of Wealth Wise speaking instead of Warren Buffett but absolutely, it’s so important as well.

I suppose as a financial planner, something that I always try and articulate to clients is that it's easy for me sitting on this side of the table, but when they are in the eye of the storm, you know, when seeing these real challenges, real potential of losing funds that are looking to have to drive their income in retirement, you know, it is hugely emotional as well. You know, we do feel that burden of responsibility as well, you know, actually it was more of a privilege that we're getting such an insight into people's lives and being able to help them. And a lot of that really is around trying to support them and navigate these challenges. But it does touch on everything that what you said there, Victoria, you know, about diversifying the portfolio from a geographical standpoint, from an asset allocation standpoint, trying to make sure that it's aligned to an individual's risk, given the objectives, the long-term view that they had. But again, you know, as Lizzy has been frantically checking her X account this morning, with all of the announcements that are coming out today, that David Cameron is rejoining the government, that political uncertainty it is just a constantly moving dynamic. It's constantly evolving. It's constantly changing. And I think that's probably where we are just now is that investments and the investment market, you know, stability, having known quantities and real growth over the longer term. But that's just not the environment that we're in just now. I think it's fair to say, isn't it?

Lizzy Galbraith: No, I think there's as much as the reshuffle today is going to result in a lot of very excited headlines. And it's great for politics watchers who are who are interested in this kind of stuff. Really, the big picture here is that it is another government reshuffle, on the heels of another one that was carried out quite recently, from the third government in three years. And we've had multiple Secretaries of State pretty much every position, there's been a lot of shuffling of people around that creates policy uncertainty, it slows down the implementation of reforms. It slows down the government coming up with new ideas for what it wants to do. And it cuts things short as well. And that just creates an awful lot of uncertainty for investors. They don't know if the government is able to fulfil its pledges on time. They don't know if policies are going to be cancelled and replaced. And it's all just quite a difficult environment to operate in when you don't have that level of certainty. Some of this would have been here anyway, because we know we have a general election next year. And we know the current government is 20 points down in the polls, which would point to a change in government occurring quite soon. But nonetheless, the uncertainty that's within this current government is also causing a lot of problems around investor confidence and, and predictability of policymaking as well.

And we see that particularly in policies related to climate and green investments at the moment.

Fraser Kerr: And that's definitely been a criticism as well, isn't it? About pledges not being fulfilled. But you know, also when governments transition, you know, from Labour to Conservative, vice versa, whoever has that power, but actually, we're starting to see it quite a lot internally, where we're actually seeing pledges falling short, because of transitions within the government and within the ruling party, it just seems to dent confidence, I think Lizzy terms of where we are, you know, not having that continuity is just challenging for our clients.

Lizzy Galbraith: Yeah, it just makes things that bit more unpredictable. It means that, you know, people may well be holding off making long term investment decisions until they see a bit more certainty or they get some more guarantees. So, it just ends up undermining what the government would like to see, which is increased investment in the UK to help boost growth, which, as you've said, has been really quite sluggish for a very long time.

Fraser Kerr: We're seeing technological disruption. There's, you know, a lot of headlines about AI and investing as well. Victoria, you see that massive technical disruption. And that's undoubtedly going to be challenging for the investment market, how that continues to evolve at this, you know, hugely pivotal time.

Victoria Scholar: Yeah, well, I mean, I think that technology has really been a key sector to watch in recent years for investors who have made fantastic gains out of the explosion of technology that we've seen. But it's also one of the big risks the over concentration of gains within tech, we've seen that the upside in the US this year has been driven by a handful of tech stocks, with the AI frenzy that's powered the so called Magnificent Seven. But that means that we haven't seen a broad-based rally. So, if the tech rebound this year, that comes hot off the heels of the tech wreck last year. If the rebound starts to falter, then that could leave the market seriously exposed to downside. So, it's never good to have a market that is highly concentrated in a single sector. It's quite risky. And although we have seen incredible gains, so far in the year, there are concerns that that could taper off at some stage.

Fraser Kerr: The element of investing that’s becoming more pronounced is that attention of environmental, social and governance or ESG investing, you know, quite synonymous with ethical investing. It did go through this period where it was incredibly positive, the returns are very attractive. But now that firms are coming under a little bit more pressure for returns, the political landscape is becoming more challenging, I think actually what we're seeing is that clients do have the desirability to deliver on this as well. But ultimately, you know, the main thing that they are focused on and we’re seeing in a few instances as returns and looking to try and drive those for themselves. Is that something that you're seeing Victoria in terms of the investment landscape, it will continue to become more and more pronounced? I mean, it's been woven into the fabric and DNA of organisations now. But do you think that for investor criteria that will continue to be really prominent, or do you think that will just be more than norm, more the minimum standard of what's expected in terms of delivering across those three key metrics?

Victoria Scholar: Yeah, I think that ESG investing is becoming increasingly popular. The shift towards the green economy and climate change are clearly massive long-term shifts that are going to become entirely ingrained in our society as well as the way that we invest. But I think investing is about not just returns, but also finding companies that align with your own values. But the difficult thing, like you say, is that a lot of these funds have struggled lately. And that's partly because of the backdrop of higher interest rates that's made borrowing to grow that much more challenging. And of course, like you say, returns are still extremely important, if not the most important thing when it comes to investing. We have the ACE40 investment list, which is the UK is first rated list of sustainable investments. ACE stands for avoids, considers, embraces. And so, we have a list of more than 200 sustainable investment options. And we've picked what we believe to be the 40 best in class funds, and investment trusts and exchange traded funds too. And these are across a wide variety of markets. Now, quite a lot of them have had a tough time lately, but not all of them. So again, it kind of highlights the importance of doing your research and finding the right funds. So, I'd say that, again, kind of aligning what we believe at interactive investor that investing is a long-term game. So, it's really important to try and not get too caught up in sort of short term, higher interest rate headwinds, and continue to see this as a real long-term investment.

Fraser Kerr: And I suppose the thing is, as well, traditional firms like Shell and BP as well. We really need them to be engaged in that ESG conversation and actually coming to the fore so that they are able to deliver and support on that as well. And that's all sort of part of that transition that you talked about Victoria, isn't it? There's not a silver bullet or an overnight to this, it really is going to be a case of companies evolving, legislation evolving, and the whole landscape really kind of changing to develop with where we are.

Victoria Scholar: Yeah, and I think that the oil giants are slowly moving in that direction. But critics would argue not quickly enough. And also, of course, we've had some huge spikes in oil prices last year with Russia's invasion of Ukraine, and then further upside risks to oil this year with the Israel Hamas conflict. Although the oil price hasn't spiked as much as people thought a few weeks ago. Also, what we tend to see when an industry dies out, is that there's this underinvestment for obvious reasons. And that can lead to a shortage of supply that can actually push oil prices higher. So, it's a tricky one, you know, there are potentially gains to be had in in fossil fuels. But it isn't going to be a long-term sustainable way to invest. It's more kind of making, or profiteering should I say, from a potential short to medium term spike. But there's no doubt that there's a structural long-term decline in the use of fossil fuels, and we're going to be shifting towards renewables. And that's where the true growth and opportunities really lie.

Fraser Kerr: Yeah, and again, it's just adapting to that change, the evolution of industry and where we are. For financial planning clients, that will be a very varied degree in terms of how actively involved in that discussion, people want to be how interested people are, who passionately feel about it. And again, it's just trying to create and curate that portfolio that's going to be right for that individual as well. And on the sort of political side. Lizzy, do you see that becoming more pronounced? I know, there's been a lot of headwinds around green pledges, what governments are looking to do, you know, is that something that you see becoming more pronounced on the political landscape as well?

Lizzy Galbraith: Yeah, definitely. I mean, how the government approaches the net zero transition is actually going to be one of the key dividing lines at the next general election. So, we've seen over the last few months, Rishi Sunak really stake out a position that that's quite noticeably different to Labour's. It’s a much more cautious approach. We've seen the government slow the pace of some of its climate pledges as well. This has been fairly controversial, but really what Sunak is trying to do is he's trying to create quite a big policy gap between where the Conservative government is, and where the Labour opposition is. Labour have really staked their future economic plans on financing green industrial developments; this is really at the cornerstone of where they think they can generate future economic growth from. They have a much more ambitious plan for investing in in these kinds of technologies than the current government do. And really, the difference here is that Labour think that it's worth using public money to invest in these projects to maintain a public stake in these projects, and then use private financing to top up the rest. Whereas the Conservative government really thinks that this is all about creating the conditions for private businesses to invest in what they deem to be the most appropriate solutions. The problem has come with the Conservative government under Sunak, changing its position, its sum of long held positions on climate pledges at fairly short notice. There's been a lot of complaints from the investor community that this is undermining confidence in Britain as a renewable destination as a place to invest in green technologies. So, this is going to be one of the really, really key arguments that we're going to see the parties have at the next general election. What place does green technology have in the economy? And what kind of economic potential does it actually offer as well? That's going to be a really, really important argument that we're going to see the parties have over the next few months.

Fraser Kerr: And you can just see that clear divergence between the parties as well and the positioning of themselves on opposite sides of the camps, with the Conservatives announcing the changes to the pension legislation around lifetime allowance. Labour, almost instinctively and immediately saying, well, we will look to undo that and unpick that. So again, that debate is becoming more and more clear. And you can see the polarity between the two main parties here in the UK. I think it's quite similar to the US almost, in it's that them-and-us mentality with the divide.  And again, that all just plays through to markets and for our individual clients around the investments that they hold, their financial plans, it just brings yet more uncertainty. And I think, you know, Victoria touched on soft recession. You know, I think there's an understanding that we don't anticipate it being akin to a 2008 financial crisis. But we do certainly see challenges ahead. And you know, it's not going to be a case of turning the corner and seeing real positivity, you know, things like that election in America. That all adds to that doesn't it, Lizzy?

Lizzy Galbraith: Yeah, I mean, if you were asking me, what's the one thing that I'm going to be keeping the closest eye on next year is definitely going to be the US election on the fifth of November next year. It is going to be incredibly consequential, it's also likely to be incredibly close. So, it's going to really come down to whether or not voters dislike the economy, or Joe Biden the most. It's really an unpopularity contest at this point. And it is looking extremely likely that Donald Trump is going to be the Republican nominee for president. We know that both Trump and Biden are personally quite unpopular. We know that voters don't approve of Biden's handling of the economy. But we also know that voters have very substantial concerns about Donald Trump's suitability for office. And he is going to be on trial throughout the rest of the campaign season. So, it's going to be a pretty unique election, just in terms of the headwinds that the candidates face. But we're expecting it really to come down to a few tens of thousands of votes across a pretty small number of states. And as you said, the difference between these two candidates in terms of policy is really night and day. We could be setting ourselves up for some really substantial policy swings, particularly on things like trade, if you do see a change of president after 2024. And that could have some pretty substantial knock-on consequences for markets and market confidence. If we see them handled, for example, through executive order, very short notice, you know, doesn't give people a lot of time to respond. That could be really quite a volatile environment, if we see that play out after the election. Whereas if we see Joe Biden win a second term, then you sort of see more of the same from what we've been having over the last four years. So yes, you'll still see you know, trade tensions be a feature of US policy, you'll also see ESG investments, the US government investment in those projects be quite high. The reverse is probably true under a Trump presidency. So, you really get the potential for quite big policy swings as a result of that election that people should really be keeping a close eye on, if they're, if they're interested in that outcome.

Victoria Scholar:  And I was going to say what I thought was really interesting, in terms of what you were saying, Lizzy is the sort of contrast between Biden's unpopularity in terms of his economic policy, versus actually the remarkable resilience of the US economy this year, because we've seen that the data has been holding up pretty strong, we've seen that inflation has come down, the US economy is growing. It's creating jobs. So, if elections are won and lost in terms of economic policy, it's surprising that Biden wouldn't get more credit for the success of this year.

Lizzy Galbraith: Yeah, it's actually I mean, it's a, it’s definitely a point of frustration in the White House at the moment as to why voters aren't giving him more credit for the US, actually, as you said, being in really quite a strong position at the moment. There just doesn't seem to be a recognition, or at least a feeling among voters that the economy feels as good as it does. And this all seems to be to do with inflation, which although it's lower than it is in the UK, it has proved to be quite sticky. And we know that as inflation rises in the US, you do get quite strong voter backlash, often the blame for that falls quite squarely on the shoulders of the President. So, it's, it's been very frustrating to Biden's team that he's not got more credit for the strength of the US economy. But equally, it just doesn't seem to be something that voters feel as positively in their day to day lives as the government was hoping they would.


Fraser Kerr: Every time I'm coming to speak with you, Victoria, I feel like I'm talking about challenge uncertainty, volatility, unknown. To kind of go full circle back to where you were about the risk and reward discussion, talking about the returns that people can get from interest rates, seeing that that's been incredibly challenging. Everything that Lizzy mentioned there really underpins those comments that you made at the start of the conversation around that narrative of people being able to take advantage of these rates and what that actually means. But then, on the flip side, it continues on to what Lizzy was saying about also, potentially the capital available for investment is actually smaller because of that contracting of the market. And people actually watching what they're spending, their budgets become a little bit tighter as well. And it really is all interwoven with one another, isn't it?

Victoria Scholar: Yeah, it really is. And these are some of the real key challenges facing investors right now - the higher for longer interest rate backdrop, the punchbowl of cheap money being removed, and the era of rock bottom interest rates well and truly behind us. So, investors and markets are having to recalibrate to this new normal of elevated interest rates. And then, of course, that ties into the elevated inflationary backdrop. And that means that investors are having to look for companies that are price makers rather than price takers. So, I think that a lot of this steers investors towards cautious positioning, and not overloading on risk at the moment, possibly looking towards more defensive sectors, and possibly the bond market as well, where we've seen yields move sharply higher, although we haven't seen this rebound in bonds as of yet. But I think if we were to see a deeper recession, then that could be one of the pockets of outperformance. And then some of the other risks that we've already mentioned the over concentration of gains in the tech sector, and then, of course, the geopolitical instability with Israel, Hamas conflict and the potential impact for oil prices, which can add to business costs, particularly in energy sensitive sectors, like aviation and shipping.

Fraser Kerr: And I think it just really does underpin that sort of message around. Individual’s financial plans are hugely tailored and specific to them. It's important to remember those longer-term goals that you've discussed and agreed with your advisor, what you're investing for. You know, and it really is coming back to that individual investor’s why, about what they're doing with these plans. But then also, it's hugely important, you know, we've talked on the podcast before about the importance of cash flow modelling - being able to tailor that, being able to adjust that and again, coming back to the reactive element and not always being proactive with a financial plan. You know, there needs to be able to be that flex and change in terms of being able to adapt. And I think that's just so important.

And you know, it's absolutely been incredible to be joined by Lizzy and you today, Victoria. So I just want to thank you both again for your time. You know at abrdn Financial Planning, you know, we're incredibly privileged to have access to both of you in terms of the resource available, the knowledge that you have, and being able to share that insight so that it can ultimately be for the benefit of our clients as well. So definitely a challenge for me to keep up with two such talented individuals but I really appreciate your time. Specially Lizzy for making the effort to come to Edinburgh. You know, Victoria will let you off been in London this time but if you’re repeat guests need to make sure then they do it in person as well. But yeah, Lizzy, Victoria. Thank you again.

Lizzy Galbraith: Thank you for having me.

Victoria Scholar: Thank you so much for having me too.

This podcast is provided for information only and does not constitute advice. If you are unsure of any of the terminology used, you should seek financial advice.
Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment.
The value of investments can go down as well as up, and could be worth less than what was paid in.
The views in this podcast are those of the contributors at the time of publication.
The information is based on our understanding as at 13 November 2023.