This is a City AM Studios production.
SPEAKER_03Hello and welcome back to Business as Usual with me, Martin Kimber. And me, Matt Kenyon. Coming up on the podcast, John Healy is the new Chancellor and he has one hell of an economic intro. What does the city make of the new cabinet? We have a big beast of the square mile in the studio to give us his view. Plus, we'll answer. Why has a Welsh finance company owned by Sir Alex Ferguson hired the founder of Burger King Kazakhstan? Now it is the second day of the new school year, and the summer holiday hasn't even started yet. And that's because Andy Burnham's cabinet is now in place, squirreling away. John Healy, he's heading up the Treasury. The new Chancellor is already facing a pretty brutal set of economic circumstances. Simon Hunt, our market watching city editor, but also Westminster facing increasingly joins us now. Good morning. Simon, it's a surprise appointment. I very confidently said it would be Ed Millerband, and I very confidently said it would be Shabana Mahmood. I think you probably said it'd be West Streeting at some point.
SPEAKER_01Yeah, uh a lot of people have egg on their face. I probably do. A lot of the uh Westminster lobby hacks do as well, because they pretty confidently predicted over the weekend it would be Shabana.
SPEAKER_03Yeah, none of them are quite as well sourced as well. Indeed, indeed.
SPEAKER_01But uh yes, the King of the North has appointed his council, and the one that the city uh that the city is most interested in is, of course, John Healy, the uh def the former defense secretary whose resignation effectively triggered the s the slow defenestration of Starmer ahead of the arrival of uh Andy Burnham from following the Makerfield by-election. Uh so it now falls to us to figure out whether the city should or shouldn't like Healy because he wasn't what people were preparing for. So I've done a bit of a bit of digging. Uh I've looked into some old handsard records because of course uh healy.
SPEAKER_03So you know how to have a good time.
SPEAKER_01Uh I certainly do. Healy's a bit of an old timer uh in Parliament. He's been around for about 30 years and he's served in various different positions in different governments, including notably as financial secretary to the Treasury uh at the tail end of the Blair government. Uh and I w was struck by um some uh some remarks he gave in the House of Commons in November 2006, where he was introducing or defending what was then called the Investment Exchanges and Clearing Houses Act 2006. Uh and he gave turner enough. Well, he gave uh what was then the FSA is now the FCA the power to veto disproportionate regulatory changes proposed by exchanges or clearinghouses. And he spoke of the need to uh preserve the present light touch regulation of financial services. And now this is pretty staggering. Can you imagine a Labour government now talking about the need to preserve light touch? It takes 20 years. It certainly has. It feels like a bygone era. Now there is a bit of context to this because at the time uh the US Nasdaq Stock Exchange was trying to buy the London Stock Exchange, and it was going to be a hostile takeover because the LSE was vehemently opposed uh to doing this. And so the government brought in some regulation to guard against it because they were worried that the rules of the Nasdaq were too strict for LSE's standards. They were worried about uh, and I quote Healy from from 2006, he said, the risk is that the takeover of the LSE by a US exchange would enable the SSE to act extraterritorially and allow creeping regulation. Healy was worried at the time that the US standards of regulation were too high for the UK. That really does feel like a bygone era. Um but he did say we want to safeguard our successful risk-based and highly competitive regime of market regulation, which has helped make London the world's leading international financial centre. Now, of course, uh his remarks were succeeded uh quite quickly by the financial crash, after which relations between the city and Westminster soured across the political spectrum. But if that is anything to go by, hopefully Healy will be a bit of a pragmatist when it comes to his relationship with the city.
SPEAKER_04One other kind of uh cabinet appointment that caught my eye was the Department for Work and Pensions Secretary, Pat McFadden, also seen by the city as quite a safe pair of small c financially conservative hands. You can kind of imagine him and Healy working quite well in tandem together when it comes to bringing down that welfare bill, potentially.
SPEAKER_01Yes, and um you know it helps that they look pretty similar too. I I always I always struggle to tell them apart uh whenever I see pictures of them walking into cabinet. Um Yeah, I I think uh Burnham realizes that getting a grip of the welfare bill is going to be one of the items on his agenda. Uh it was something that Starmer attempted to do and largely failed. Um but if that if the government have any hope of restoring uh faith or or securing the faith of the of the bond markets over the next couple of years, uh getting a grip and reigning in uh excess government spending is going to be have to be quite high high up the agenda.
SPEAKER_04Very briefly, um yet another loss for the London markets this week. We're about to ask uh the big beast of the city, Christopher Mills, uh, who's coming in in a moment about this as well. But Simon, um what who is the company? What is the company that has been picked off?
SPEAKER_01Yeah, it does feel like we've we've almost reached the point where we should probably just have a daily segment in the podcast about finding out which have a special graphic for it. Yeah. Which which firm has left the London Stock Exchange today. Well, uh this week it's the turn of uh Mighty, which provide uh cleaning and facilities management services for a lot of uh big companies in the city. Uh best probably the biggest one is Heathrow, so they clean the entire of Heathrow Airport overnight.
SPEAKER_04That's a good contract to get.
SPEAKER_03Yeah. Yeah, yeah, yeah.
SPEAKER_01I would have thought so, yeah. Um but they've agreed to a uh 3.1 billion pound takeover uh by another facilities management services firm called OCS. Uh now, what's interesting is this isn't an American one, this is actually a British one. So this is one of the rare takeovers that doesn't involve a uh US firm swooping in. I think there's also some interesting context to this because the chief executive of Mighty, um, a guy called Phil Bentley, uh, actually early this year unveiled his plans to retire because he's in his late 60s, wants to give it a rest, and he he was expected to retire next year. So perhaps he's arranging a bit of a leaving gift for himself by managing to pump up the Mighty share price by about 40% just before he exits.
SPEAKER_03Wow. A mighty boom. Um, one more thing, Simon, and this is a bit of a mouthful. Why has a British finance company owned by Sir Alex Ferguson hired the founder of Burger King Kazakhstan?
SPEAKER_01I mean, isn't it obvious? Surely it's obvious. No, well, this is actually a company called Pocket, uh, based in Wales. Again, we've we've spoken on this podcast about the Welsh Fintex. Um, and they've hired to their board a guy called Annuar Utamaratov. Apologies if I butchered the pronunciation of that name. Uh, but he's the man who who founded um uh as you say, Burger King Kazakhstan.
SPEAKER_03The the um I presume that that is a um a satellite of the main Burger King company rather than just a huge IP class.
SPEAKER_01It's not a lawsuit. Yeah, um, but they've they grow, I mean they've he founded the company in 2012. It's grown to over 50 restaurants across Kazakhstan. Um he is the son of Kazakh billionaire Bulat Utemuratov, uh, one of the country's wealthiest individuals with a net worth of $5.4 billion, according to Forbes. So I suspect that is the thing that's more interesting to pocket rather than the involvement in uh Burger King, Kazakhstan. Uh, but this is a company that um uh recruits customers who do not have or have a poor credit score. So it's difficult for them to secure financing from established banks and institutions because the scale of the risk they have to absorb is a bit too much for some uh companies. So they so this company is known for getting interesting uh people from outside to support it. As you mentioned there, they've they've got investment from Sir Alex Ferguson, former Manchester United manager. Uh they also recently uh secured a loan from a Spanish railway architect. So they're they're quite good at um finding interesting people to invest.
SPEAKER_03Well, so yeah, it is quite an interesting market, that sort of low credit score fintech.
SPEAKER_04There's many British podcast hosts.
SPEAKER_03Well, yeah, I just thought it is interesting because I I mean I've read about business before how they often hire people who used to work at places like Wonga, like the sort of defunct um payday lenders of the 2000s and 2010s. But frankly, that's a story for another day. Simon, I think we've we're all out of time. Thank you very much for joining us. We'll be chatting to you regularly about this new regime in which we find ourselves.
SPEAKER_01Yak Shamash.
SPEAKER_04Now, time to get some reaction from the city to Andy Burnham's new government. We're joined by Christopher Mills, Chief Executive of Harvard Private Equity, and safe to say, I think city grandee, we can say. Well, let's say it, old boy. First of all, Chris, thanks very much for coming in. Just give us your reaction to the new cabinet and the new direction of this government.
SPEAKER_00Well, to be honest with you, the sort of new cabinet turned out to be somewhat of a surprise. Um, I would make the reasonable presumption that our new chancellor will fund um our armed forces now. It'd be a bit embarrassing if he refused to. But is there really going to be a lot of change that's going to help the city? To be honest with you, I'm pretty doubtful about that.
SPEAKER_03And we were talking about this on uh on the way in. Um, but we discuss almost daily now delistings from the stock exchange. Uh I know this is something that you're quite passionate about and the nature of small caps, uh, something that we discussed with Simon earlier, but mighty delisting uh this week. Uh what does this tell us about, I suppose, the new Chancellor's intray and just the general state of the capital markets in London at the moment?
SPEAKER_00Okay, I think one has to go back several years to understand how this disaster has created itself. The first problem, which started, gosh, I think it was under the Tories, was when pension funds were obliged, uh defined benefit funds were obliged to invest to match the maturity of their liability. That suited the government because it forced those funds, and they were big funds, into government bonds. But of course, it meant that that started a process of de-equitization. So big pension funds now typically only have sort of 4% of their assets in UK equities. And I think that actually includes the House of Commons pension fund. So the problem then exacerbated itself because the FCA basically said that everybody in a certain asset class, so if you're a high net worth individual, prepared to take risk, you should have broadly the same performance as everybody else in that asset class. So if you take, and we've seen more and more mergers in the industry of fund management, say 100 billion, let's say he's got 30 billion in the high risk category. If he's got 100 stocks in a portfolio and that's really going, that means he's got to have a company where he can put 300 million to work, and he's got to put 300 million to work, he's unlikely to want to own more than 5% of the company. So QED, there's got to be a £6 billion company that forces them into the overseas investments. The solution to that would have been if the small cap fan managers like ourselves and you know, I don't say the Slaters or the Chelvertons, et cetera, but even the Schroeder's had good inflows. But because the negative there was so much negative surrounded, the performance has been bad. For example, believe it or not, over the last 25 years, the aim index is actually down. I think something like 30%. So what did that do? That created redemptions. Inevitably, people had to sell them all liquid stocks. That created actually worse performance, if you think about it, which created a downward spiral. So inevitably, all these, let's say, FTSE 250 companies and lower became very cheap, very attractive to private equity. And the fund managers probably in their heart know they're selling some of these companies too cheaply, but the reality is the bids create the performance, which creates the liquidity, which gets them out of the doom spiral.
SPEAKER_03So what you're describing there is a bit of a vortex that is sweeping FTSE 250 and lower out of our own public markets, and it feels very structural. Is there anything that a new government could do, do you think, to decelerate this process or even start to reverse it?
SPEAKER_00Well, I mean first thing which they won't do is restore full IHT for AIME. That's not going to happen, in my opinion, but the risk is to the opposite. And that's been a deadly impact on the IHT funds, which again is the same story. Companies started to leave AIM because they didn't see any benefit anymore. So, like people like CVS left, and suddenly there's a multi-billion pound company that's got gone to the main market, that forces all the AIM shareholders to have to sell, and that's hundreds of millions, so that depresses the price. Then the other thing is that as those redemptions continue to hit the IHD funds, they're getting the forced sellers. So the A market goes nowhere, and then of course somebody comes along and bids for Ramsdans, bids for um God, we've got several uh dozens of examples recently.
SPEAKER_04Um Christopher, just quickly, we've got um a much more interventionist government, it seems, when it comes to economic affairs. So he's already pledged to eradicate homelessness. Um he wants to cut VAT on energy bills, uh, various other spending commitments. We might be looking at a sort of cut in income tax. All this has to be funded from somewhere. Lots of people making a noise about equalizing capital gains tax with income tax.
SPEAKER_00Okay, again, let's sort of let's let's discuss it very personally. For example, one of my best personal investments is online finance. Over four or five years it's up 11 times, believe it or not. Wow. So today it's gone from £10 to £110 a bit higher. Today I own two let's say £100,000, although let's say yeah, I earn £24 of tax for every hundred. If I say I believe that stock goes up another 50%, and I believe it easily could over the next three years, I own 67.5 pounds in tax. It's an 83% tax rate on the marginal increase. Who's gonna think that's very sensible? So it will encourage people not to sell, so I don't think it's gonna raise as much money as they hope. Secondly, it actually is fundamentally inefficient because logically people should be able to sell the stocks and invest in new ideas. But you don't want people trapped in, let's say, Microsoft when it falls out of bed. So is it efficient for the savings of this country to stagnate because people won't sell because they won't pay the taxes? So I think that's the first real issue they've got to figure through. Um we've seen so many government initiatives which are meant to raise taxes, and suddenly they don't because people do logical things. So when the NI went up, what happened? People laid people off, particularly the leisure industries. They raised prices to help cover it, inflationary. And what's more, they then didn't give as much pay rises, so everybody actually paid the price, so less income tax as well. You know, there's so many laws of unintended consequences when you make these decisions. And look at the housing idea. Labour's housing policy has been a complete joke so far. They've done nothing to stimulate demand. Housing starts are down, gosh, something like 50% year on year now. There is no chance of meeting the one and a half million target, and they know it. It's just not possible. And they don't even understand the mass of how they would have got to it. If you very simplistically, if you take Persimen, a person needs £200,000 of working capital for every house it produces. Gleason is about 160,000, and I'm on the board of Gleason, and we do slightly cheaper houses. Think it through logically. If you're going from producing uh, let's say 152, let's say 200,000 houses to 300,000 houses, that requires 20 billion of incremental capital being created with the industry to do that at a time when you've got billions required for the cladding crisis, and you've got higher taxes as a penalty for the cladding crisis. How is this remotely possible? And some people have to have pay dividends, and if you've got no final demand because there's nothing to stimulate final demand, house builders can't increase their pricing, the costs of everything is going up. Um, this war in the Gulf continues, there's a lot of energy that goes into a brick. Now, at the moment, the brick manufacturers have got excess stock because there's no demand, but one day they won't have. So the price of bricks is gonna go up. If he's going to build all these houses, uh A, it's gonna take time, and he doesn't have the time to do it in two or three years. But what's that gonna do? That's gonna be a huge impact on labor within the industry, which isn't going to help the house builders because they'd probably use contractors to do it, at least in the beginning. And then to capital, the whole policy collides with itself because they this massive war they've done on buy-to-rent. So if you actually look at the buy-to-rent marketplace, there's about 5.1 million houses. One million of those houses are owned by people who have one house in buy-to-rent. Another one and a half million, they own less than four, so two to four. And then another 700,000 is owned by nine or less. These people are being slaughtered. They don't get tax relief anymore. They've got all these environmental things they're gonna have to spend on their houses. So surprise, surprise, they're selling. So if you again take a person's statement in the public domain, they say we're not worried about competition from other house builders. We're worried about the competition from this monumental number of people who are basically leaving the buy-to-rent sector. And when they come to sell a house, they're not so price sensitive. They bought it a long time ago. They're worried about the capital gains tax going up. Let's get it out now. He's trying to create all these houses, but he at the same time, he's going to materially reduce the number of houses people can rent. So, how does that work? And then there's another insane government policy. They came out with taking away section 21. Now, section 21 basically what they said is it preserves people's right to live in the house. What there's less publicity is there's another little clause that says when you put the rent up, the tenant has the right to appeal. That's fine, but you only get the uh tenant the rent increase when the tribunal has said that's fair. Can you imagine there's five million people in these houses all thinking I can delay my rent increase by going to a tribunal? The whole system will collapse. It's so obvious. Well, I think we should make you Chancellor, to be honest. Um and how does the little guy with his one house think this is a good idea?
SPEAKER_03Well, yeah, I mean, there are a lot of anxieties in the city. I think you've got into quite a few of them. That's sadly all we have time for, but I'm sure we'll have you back on the podcast very soon. Thank you very much for joining us.
SPEAKER_04Thank you for your time. Well, that's just about all we have time for today. Thank you very much for listening to or watching Business as Usual.
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