Election 2024

Election 2024

All change means little change for markets

Given the political events at the end of last week, and over the weekend in France, we thought you might welcome an update. We will be writing more fully in a few weeks’ time with our half-yearly Profile Report so with that in mind, we will keep things relatively brief.

As predicted by the polls, Labour secured a landslide victory at the General Election on the 4th July, securing 411 seats giving them a majority of 172, and propelling Sir Keir Starmer to office as Prime Minister. The Conservatives endured the worst election outcome in their history, obtaining 121 seats, prompting the resignation of Rishi Sunak and starting the process of a leadership contest. Meanwhile, the Liberal Democrats enjoyed their strongest showing since 1923, winning 72 seats, and Reform UK made significant inroads into the Conservative vote, winning more than 14% of the national vote.

This large Labour majority gives the party the power to stick to its central plan of stability, encouraging private sector investment, and lifting longer-term growth. The government plans to implement reforms to achieve these aims, but this is against a backdrop of fiscal constraint and having already committed to current fiscal rules. In the coming weeks we should expect the new government to provide more detail, but the impact on the economy is likely to be relatively small and take time to bear fruit, reflecting a pragmatic approach with a dose of realism. Taking time and avoiding knee-jerk actions will certainly please financial markets.

The next Budget is likely to provide further detail, and this will be interesting, given Labour has said there will not be major tax rises or spending cuts. It takes the Office for Budget Responsibility (OBR) 10 weeks’ notice to prepare its forecasts, meaning that any budget would be unlikely before mid-September, and more likely in the form of an autumn budget in October or November, coinciding with a comprehensive spending review. The prospect of using some leeway around the fiscal rules over time, and possibly more government borrowing, and certain tax rises cannot be ruled out. On the latter, there are some obvious areas which may come under the spotlight – capital gains tax and inheritance tax being two of them – so areas to watch as we move through the government’s five-year term.

In the very near-term, any economic implications are likely to be modest in nature, although the lifting of political uncertainty should be a clear positive for UK assets. Markets have broadly taken the outcome in their stride, with UK domestically focused equities outperforming UK companies with high international exposure, whilst the pound has strengthened. This is not unusual. With the exception of the ill-fated Truss era, politics hasn’t meaningfully moved markets in a long time, and none of the immediate fall-out following the election are expected to generate any extraordinary movements, largely because so much has been sign-posted.

Across the Channel at the weekend, we also had the second round of the French elections. The far-right National Rally, which led the first round of the elections, was pushed back to third place, lagging a left-wing alliance and President Macron’s centrists. The prospect of a Far-Right majority can therefore be ruled out. Nevertheless, at this point, the country is facing a hung parliament and possible ‘grand coalition’, which may add to fears around the country’s fiscal position. But unlike the UK, the political upheaval in France has had a greater impact on financial markets.

A landslide win for the French far right in the European elections, coupled with the surprise call for a snap election, led to the worst week in two years for the French benchmark index CAC 40. French government bond yields also went up and the spread between French and German bonds (the difference between the yields of these two securities) widened, reflecting investor unease. But political events in France alone were not enough to halt wider European stock markets. The Euro STOXX50 index has still delivered a near 21% return over the past 12 months.

An object lesson in the need for diversification if ever there was one. We will be writing more fully towards the end of July with a full appraisal of financial markets, and the performance of your chosen strategy.

Dr Andrew Mann

Investment Director