Client Update - 5th July 2024

After weeks of campaigning and debating, the election is now behind us. As highly anticipated, the results this morning reveal that UK voters have brought the Labour Party back into power for the first time in 14 years. Interestingly, in the lead-up to this outcome, financial markets showed little reaction despite the expectations of a new majority government.

This week British stocks have remained calm, bond fluctuations have stabilised and hedging against pound weakness is at a seven-year low. This is surprising considering the market's negative reactions following the 2016 decision to leave the European Union and Liz Truss’s disastrous premiership in 2022. The relatively calm response leading up to today's results suggests that the market is comfortable with the Labour Party's victory, despite its traditional support for higher taxes and trade unions, which has historically been at odds with market preferences. It seems the response by investors is turning out to be one of hope that Starmer’s centre-left platform will draw a line under a tumultuous period in British politics, especially at a time when political volatility is growing in neighbouring France and across the pond in the US.

This week, Bloomberg reported that French politics is making the UK appear strong and stable, highlighting market anxieties about Marine Le Pen’s hard-right Rassemblement National's success in the first round of France’s legislative elections. Le Pen’s party secured the lead, confirming its dominance in French politics. The second round of voting, set for this Sunday, is expected to see all other parties unite to prevent Le Pen’s party from achieving an absolute majority, resulting in a hung parliament. While markets typically view this situation unfavourably, they are more concerned that a Le Pen majority would lead to significant spending increases, even more than the usual French government. Although Le Pen’s party is right-wing socially, its spending policies — such as cutting VAT on fuel and reducing the state pension age — appear left-wing to British observers. Given this context, many believe the outcome is too uncertain to predict, but it is clear why the more predictable result of the UK election will make the UK a safer bet for investors in the coming months and possibly years.

Looking further abroad, last Thursday, Joe Biden and Donald Trump faced off in the first debate of the 2024 US presidential campaign. The debate has been widely reported as a disaster for Biden, whose disjointed performance shocked and angered many loyal Democrats. Some have openly questioned whether he should continue to seek a second term. By Friday morning, many Democrats were urging Biden to step aside for a younger nominee, suggesting potential replacements. However, the current President seems determined to continue his campaign. Appearing more energetic at a rally on Friday afternoon where he took to the stage stating that while he might not walk or debate as well as he used to, he knows how to do the job.

The consensus around the recent elections is that despite a change in government in the UK, the country is still better positioned politically than France and, after last Thursday's performance, the US. Equity investors are generally relaxed about the election’s impact on the broader market as Labour need the economy to grow to increase their tax take and therefore, they have already started a pro-business stance – on the outside at least. Predictions ahead of this morning's results suggest that the pound is likely to be well-supported by Labour, driven by optimism that a new government will foster closer ties with the European Union, boosting trade. The outlook for UK gilts is less clear than that of sterling because Labour's plans for fiscal policy and government finances remain uncertain. Predictions indicate that while Labour will aim to establish a Budget quickly, they are unlikely to make any drastic policy changes immediately after taking over, learning from Liz Truss’ mistakes. Up until this moment, everything has progressed as we expected, we now await the detail that was lacking from the Labour party manifesto. As details emerge, we shall share our views.

Until then, do look after yourselves and good luck to our sporting nations in action this weekend.