In this week's briefing we’ll explore how a Labour government could affect UK venture capital investment, the EY ITEM Club's latest forecast which predicts robust GDP growth for the UK, and the SEC's approval of Ethereum ETFs, marking another milestone for cryptocurrency.
Implications of the New Labour Government for Venture Capital in the UK
- Labour’s “Start-Up, Scale-Up” report aims to make Britain a premier location for starting and growing businesses. Key recommendations include unlocking institutional investment, transforming the British Business Bank, and improving access to public procurement for startups.
- Labour is expected to maintain and expand the "Mansion House Compact," encouraging major defined contribution pension providers to allocate 5% of their assets to unlisted securities by 2030. This could de-risk investment portfolios and streamline investments in UK businesses.
- Labour announced plans to align the UK Infrastructure Bank and the British Business Bank under a new National Wealth Fund (NWF), with an additional £7.3 billion allocated to accelerate investments in priority sectors. This aims to catalyse up to £3 of private sector investment for every £1 of public funding.
- Chancellor Rachel Reeves proposes taxing carried interest at income tax rates, but only if fund managers have not invested their own capital, easing some opposition from the private equity sector.
- Labour’s manifesto supports schemes like Venture Capital Trusts (VCTs), the Seed Enterprise Investment Scheme (SEIS), and the Enterprise Investment Scheme (EIS), schemes that are crucial for incentivising investment and entrepreneurship through tax reliefs. The party also emphasises commercialising university research and reducing barriers to scaling businesses.
- These points, taken from our recent in-depth GCV Insights blog post, provide an optimistic outlook for the future of UK venture capital.
Strong Start to UK Economy with More GDP Growth to Come
- The EY ITEM Club Summer Forecast expects the UK economy to grow 1.1% in 2024, up from the 0.7% growth projected in April’s Spring Forecast, thanks to a stronger-than-expected start to the year.
- GDP growth is predicted to continue, reaching 2% in both 2025 and 2026. Lower inflation, forecasted to average 2.5% in 2024 and 2.2% in 2025, is expected to boost household spending power.
- The Bank of England’s Monetary Policy Committee is predicted to reduce the Bank Rate to 4.75% by the end of 2024, with the first cut anticipated in September, due to the persistently high services inflation.
- However, tighter fiscal policy could limit GDP growth, with the new government likely to maintain low levels of public sector spending and implement planned tax rises to reduce the public sector net debt-to-GDP ratio.
- Business investment prospects remain positive, with investment expected to grow by 1% in 2024 and 3.2% in 2025, supported by anticipated interest rate cuts and ongoing resilience in private sector investment.
- “Brighter conditions are expected to be matched by a rise in business investment in 2024, followed by an even more significant uptick next year. This would continue the UK’s strong post-pandemic performance in private sector investment and, alongside consumer spending, should be a key driver of national growth going forward,” said Hywel Ball, EY UK Chair.
US SEC Approves First Ethereum ETFs
- The US SEC has approved the first spot Ethereum exchange-traded funds (ETFs), marking another significant milestone for cryptocurrency investors following the debut of Bitcoin ETFs earlier this year.
- Ether ETFs, including those from Grayscale Investments, BlackRock, and Fidelity, gained approval, with trading set to begin imminently (Tuesday 23rd).
- Ethereum is the second-largest cryptocurrency, with a market cap of about $415 billion. The SEC's approval follows ether futures ETFs launched last year, signalling a growing acceptance of crypto assets.
- Grayscale Investments will retain a 2.5% management fee for its converted Ethereum ETF, while other issuers plan to waive fees initially, with most final expenses below 0.25%.
- Investors may find it challenging to grasp Ethereum's broad range of uses beyond storing value, unlike Bitcoin's "digital gold" narrative. However, some predict that ether ETFs could attract about $15 billion over their first 18 months.
- Chief investment officer of crypto fund sponsor Bitwise, Matt Hougan, says, “Traditional asset management can no longer ignore crypto as an asset class, I think you’re going to see effectively everyone embrace this space.”
Pound Expected to Surge Through the Rest of 2024
- Amundi, Europe’s largest asset manager, forecasts that the pound will rise to $1.35 by the end of the year, driven by the UK's more stable economy and government, when compared to some European countries.
- The pound has already increased from $1.273 at the start of 2024 to $1.293, outperforming other major currencies against the dollar and reaching its highest level against the euro since August 2022.
- The US presidential race has created uncertainty, and France is dealing with political turmoil, making the pound a more attractive option for investors.
- Along with this, the Bank of England is expected to cut interest rates later than its peers, further supporting the pound's strength.
- Andreas Koenig, Amundi’s head of global FX, notes the stable economic environment and government as key factors supporting sterling, making it a less risky and diversifying alternative in portfolios.
Final Note
This week's headlines highlight an optimistic future for Britain's venture capital investments and economic growth.
The Labour Party's victory and its focus on public investment present an opportunity for an even more favourable environment for venture capital in the UK.
Alongside this, the expected surge in the pound reflects Britain's economic stability amidst global uncertainties, indicating a robust environment for investors and contributing to a positive outlook for the UK's future.
At GCV, we remain committed to providing the latest insights into the investment and wider economic landscape in order to support investors in making well-informed decisions when choosing where to allocate their capital.
If you would like to find out more about a number of tax-efficient investment strategies available to UK investors, discover our range of downloadable resources here.