All change for our government… but no change for UK asset markets?

Understandably, the forthcoming general election has garnered a huge amount of interest from our clients. You want to know whether the likely change of government in early July matters for your portfolio and if it changes our views on UK investments. The short answer is no, not really. Although as always, we should keep an open mind. Whilst we in the UK might look upon the general election of early July with keen interest, global investors just don’t care, and market shockwaves are unlikely to be felt in the coming months.

We believe that there are three reasons why the UK election is unlikely to move markets in a major way, aside from the inescapable fact that the UK is shrinking in global influence.

No alarms and no surprises

The chief factor is that the result is already deeply discounted. What happens is highly unlikely to be like the ‘surprise’ thrown up by the result of the Brexit referendum in 2016, or a high-stakes gambit like President Emmanuel Macron’s recent election call in France, both of which triggered significant market volatility.

Investors and markets are expecting the incumbent Conservative Party to suffer a crushing defeat and the Labour Party a major victory.

The recent reemergence of Nigel Farage and his commitment to Reform UK, and the problems faced by the Scottish National Party (SNP), make it even more likely that the widely expected outcome of a major Labour majority comes true.

The name’s bonds, market bonds

Secondly, there’s no signs that any future Labour government is planning on pursuing any maverick policies. We might all be able to find something that we disagree with in their manifesto, but the reality is that it is mostly unexciting, without any unexpected policies or promises.

Finally, any new government might think they are in charge, but the reality is that the bond market holds the trump card. Because of the teetering and ever-growing debt pile that has been amassed by our governments over the last 30 years, we don’t have the financial or fiscal wiggle-room for ‘out of the box’ policies. The ill-fated Liz Truss administration was a clear reminder of the practicalities of overseeing our country in its parlous financial position.

Of course there could be some reaction, but we would be expecting mere ripples rather than shockwaves because of this election.

More likely is that the UK markets simply continue to perform based upon corporate fundamentals. UK equities have started to perform better in recent months, and we think this should continue. UK companies’ shares are cheap, profits are expected to grow, and some of the bigger sectors in the UK equity index have found recent favour.

Another potential tailwind could be that international investors may breathe a sigh of relief at the changing of the political guard, after a period of stagnation, but it is more likely that they might decide to ‘buy British’ as our equity and corporate bond markets are decent value, rather than anything else. It is hard to imagine international appetites for UK companies’ shares dwindling even further.

Gilts, currencies, and future political changes

Where we could arguably see a bit more excitement is with UK gilts. But again, the gilt market will likely be mostly dominated by global inflation and interest rate trends, even if some domestic factors could have a bit of an influence. Whilst we continue to admire the improved returns on offer from short-dated government bonds, particularly those which offer a tax-efficient return, we remain deeply sceptical of lending money to the UK government for long periods, given the uncertainty over our borrowing requirements, inflation trends and interest rates in the coming years.

Whilst predicting the forthcoming fluctuations in currency markets leaves one always open to ridicule, we are again not expecting anything exciting.  A fresh government with a decisive mandate could be a support for the pound, with a lot of caveats, but the pound is likely to be relatively rangebound, with the cable rate* continuing to oscillate between US$1.20 and US$1.30, as it has for quite a long time. Of course, a currency rate also depends on the other side of the equation, and as we have seen with the euro recently, it is hard to find that many other countries in solidly stable states. Maybe, given the issues faced by all major developed world nations, the UK could benefit from being the ‘cleanest dirty shirt’ in a global context. That would make a nice change.

Forthcoming elections in France and the US are likely to be a greater focus for investors in this year of global elections. But again, ultimately, the key driver of asset returns will be dictated by the price one pays for an asset and the holding period ahead, rather than an election cycle, even if that can be a contributing factor in the short term. In conclusion, this election could well be a non-event in market terms, but that doesn’t mean that the outlook for UK assets is as boring as the election is likely to be. We remain positive on UK equities and UK corporate bonds for our client portfolios as they are good value, unloved by global investors, and offer potentially attractive returns in the future.

How do you think this year’s UK election will affect the markets? Do you think there will be any significant change? If you think you could benefit from the commentary in this article, or you have any concerns, please do get in touch.

*The cable rate is a term meaning the exchange rate between the US Dollar (USD) and British pound sterling (GBP).

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

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