“Brown effect” hits UK shares

Market underperformance: 'Brown effect' hits UK shares - at Moneyweek.co.uk - the best of the week's international financial media.

If Britain's economy has been so strong under Labour, why has the stockmarket done so badly? asks David Smith in The Sunday Times. The FTSE 100 is about 1% below its May 1997 level, while the FTSE All-Share has gained a mere 3%. Worse, British stocks have dramatically underperformed their global counterparts. Germany's DAX is up by 13%, despite an "abject" performance by the economy; France has seen a 39% rise; while America's Dow Jones index has advanced by 45% - the recession and a wave of corporate scandals notwithstanding.

It seems that the key factor in the lacklustre performance of UK stocks is Gordon Brown's decision in his first budget to scrap the dividend tax credit for pension funds, which has cost them £5bn a year. The move, in conjunction with the weakening market and a new accounting rule, FRS17 - which has encouraged pension funds to avoid the short-term volatility of the stockmarket because it requires a snapshot of the state of the fund to be stated - has prompted pension funds to sell stocks. Meanwhile, the erosion of tax advantages of Isas - "which were never as good as Peps and Tessas" anyway - has dented their appeal among retail investors: net sales of Isas in June were 60% down on a year earlier. According to John Littlewood of the Centre for Policy Studies, these and further tax changes, along with new regulations on business and higher taxes, explain why the inflation-adjusted (real) return on shares under this Government has been -10%, a typical market performance under Labour.

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