A seismic shift in UK politics - stability in asset markets

Since the UK general election was called in May our view has been that the Labour party would achieve a large working majority. We were obviously in line with the consensus but this has now proven to be the case nevertheless. Despite polls suggesting there would be a Labour landslide, it’s still shocking to see the scale of their victory and the defeat of the Conservative party. The results this morning demonstrates the new Labour government will have a considerable majority to work with. There were some extraordinary individual events, with several cabinet ministers and a former prime minister all losing their seats, making this election one that will last long in the memory of UK voters.

A calm market amid a landslide

Given the result was extremely well telegraphed by opinion polls, we felt that the market impact would be limited. The opening moves across financial markets have been calm, with immediate reactions muted, suggesting that this result was expected. Despite the scale of the victory and the opportunity a huge majority presents to the incoming government, financial markets are currently relaxed by the prospect of the new administration. This could change in the coming months, as the Labour government start to flesh out their policies and unveil how they intend to manage the country and the economy in the coming years.

An obvious focus for all of us will be the new government’s immediate and future spending and taxation plans, in which expectations are that to fund their policy programme, there will have to be a rise in taxes. While there was very little open discussion of this on the campaign trail, the incoming government will recognise they need to keep the bond market calm, by attempting to raise revenues as their spending grows, as the UK’s current debt pile is already extremely large and there will be a lot more debt to be issued (in the form of UK government bonds).

Having won so big, despite only winning a relatively small number of extra votes, we are already seeing many on the left of the party demanding a more aggressive stance on tax and spending. How the new prime minister and his inner circle control these pressures will be watched keenly. Keeping the cost of borrowing under control and avoiding the market turbulence experienced during the short-lived Liz Truss premiership will have to be a priority for our new chancellor and the Treasury. Whether they can master this will be a key factor for market volatility in the UK in the coming years.

There will be no immediate changes to our investment strategies after the election. Our view remains that UK assets are good value and can offer investors attractive returns in the coming years.

From polls to portfolios, ballot papers to bond markets

UK equities have been consistently relative underperformers, but there is a chance that the promise of political stability - even if there are understandable concerns about future tax policies - can usher in a period where the discount that was applied to UK equities because of our uncertain political situation is gradually removed. Based upon corporate fundamentals and valuations, there is a strong case to be made that UK equities could go from global laggards to global leaders in the coming years.

UK corporate bonds also offer comparatively high yields to investors, leading us to believe that they too deserve a place within clients’ portfolios. Current yields compensate investors properly for the risks they’re taking in lending money to high-quality companies and are considerably higher than they were only a few years ago. We are still expecting the Bank of England to start cutting interest rates in the next few months, with support for the economy necessary and inflation appearing to be mostly under control. This could benefit areas of UK fixed income.

Bigger questions undoubtedly linger over the outlook for UK government bonds and our currency. In recent months we have seen renewed volatility in longer-term borrowing costs for governments as uncertainty rises over the prospect of a second Donald Trump presidency in the US and the possibility of political change in France and the UK. With government bonds, we have limited exposure and have insisted on keeping the maturity profile of the bonds we own relatively short, ensuring that we do not expose our clients to the potential volatility that can take place with longer maturity bonds, where interest rate, inflation and political risk could become a reality in future years.

In terms of our currency, which is typically the earliest place to view signs of concern, we feel that sterling will remain in a similar range to where it has been in recent times and are not expecting any outsized moves in the coming months. This could of course change, and we will be open-minded about what might happen as we start to see the Labour government’s plans coming into action.

Looking across the Atlantic and into the future

That open-minded approach will be vital as we go through a period of political uncertainty across the world in the coming months. The immediate election in France, with the final round of voting on Sunday 8 July is a possible source of short-term market stress. The daunting and uncertain prospect of the US presidential election in November is another reason why our balanced and diversified approach to investment is appropriate.

We remain cautiously optimistic that the outlook for many assets is attractive. Valuations across many financial markets, including those in the UK, are sensible and we believe that this will be the much bigger determinant of future portfolio success, rather than the continued shifting sands of politics across the world.

If you would like to hear more from our Chief Investment Office, join our summer market update webinar on 11 July at 10.00, where we will dig deeper into both the UK and French election results, the upcoming US election and their effects on markets and our client portfolios.

Register here

If you would like to discuss how the result of the UK election might affect you and discuss details about how we might be able to help, please don’t hesitate to get in touch.

For further information on any of the terms used in this article please see our glossary of investment terms.

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