Prime minister Rishi Sunak has set the UK’s general election for 4 July 2024, much earlier than anticipated, after a raft of positive economic data.
Sunak is seeking to capitalise on recent good news, with a stock market rally, higher GDP growth and a lower inflation print. Yet voters may not be that easily swayed. As Royal London Asset Management’s head of multi asset Trevor Greetham pointed out, “context is everything”.
“We’ve just seen both the best quarter-on-quarter GDP and the lowest year-on-year inflation in almost three years,” he said. “[Yet] in real terms, GDP is still only 1.5% above its pre-pandemic, pre-Brexit level. Meanwhile, the price level for consumer goods is a whopping 23% higher.”
With Labour leading in the polls, fund managers predicted that a victory for Keir Starmer would be positive for the housing market and the construction and infrastructure sectors.
On the other hand, sticky inflation and possibly the timing of the July election could prompt the Bank of England to hold interest rates steady until August.
Elsewhere, however, fund managers expect the election’s impact to be muted. The new occupants of numbers 10 and 11 Downing Street will have their hands tied by the weak state of public finances, limiting their ability to make major policy changes.
As Chris Beauchamp, chief market analyst at the trading platform IG Group, said: “So far, the election announcement has caused barely a ripple in financial markets.”
Rate cuts could be delayed until after the election
The most-recent UK inflation print showed progress but fell short of market expectations, said Gaël Fichan, head of fixed income at Syz Group.
Core inflation excluding food, fuel, alcohol and tobacco remains high at 3.9% (compared to 4.2% a month ago) while services inflation remains at 5.9%.
“This persistent inflationary pressure has led markets to drastically lower expectations of a Bank of England rate cut at its upcoming meeting, from a 60% probability last week to just 10%,” he said.
“With the latest inflation figures, the BofE has all the economic justification it needs to possibly wait until August before adjusting its monetary policy.”
The market reaction was “quite pronounced”, he continued. “The 10-year UK yield jumped by 10 basis points, while the front end of the gilt yield curve surged by 15 basis points to 4.45%. The UK yield curve remains inverted, with the gap between the two and 10-year UK yields narrowing to 20 basis points, the lowest level since March.”
A snap election should be positive for equities
An early election will be good for the UK stock market and the economy, argued James Henderson, co-manager of the Henderson Opportunities Trust, Lowland and Law Debenture.
“It could break log jams on major investment decisions we’re seeing in several industries. Uncertainty about planning regulations and the retail energy market are just a couple of examples of things causing stasis,” he said.
Wealth manager Evelyn Partners estimates a base case of 5.6% (nominal, annualised returns) for UK equities over the next 10 years. This is based on future real GDP growth, valuations and dividend yields.
Chief investment strategist Daniel Casali said: “Under a bullish scenario, where Labour lifts the UK’s potential growth rate and valuations expand, then that would rise to 7%, while a bear case would produce returns of 4.9% per year.”
Hawksmoor Investment Management’s chief investment officer Ben Conway is much more bullish and believes UK equity returns could reach 10% per annum.
Labour’s Financing Growth document, which sets out the party’s plans for the financial services industry, is “a UK equity fund manager’s dream”, he said. It cites the undervaluation of the UK stock market and low levels of investment by pension funds in their home market as problems. It also states that vibrant capital markets are a necessary precondition for economic growth.
Casali was more circumspect. “Ultimately, what will probably drive UK equity returns is whether a Labour government can improve the investment landscape for UK companies. In the Mais lecture, shadow chancellor Rachel Reeves recognised that unlocking private investment requires institutional reform to encourage UK financial companies to invest in productive assets domestically,” he said.
The UK stock market has, in the past, reacted positively to a change in government, said AJ Bell investment director Russ Mould. Since 1962, the FTSE All Share has recorded a double-digit percentage gain, on average, in the first year after an election that ushered in a new prime minister. There were greater average gains when the governing party changed.
“Labour governments can also point to healthy average stock market gains during the terms of their five prime ministers during the 42-year era of the FTSE All Share,” Mould continued. “That said, the UK equity market has done better since 1962, on average, when the Conservatives have triumphed at the ballot box.”
Planning and housing
Reeves has committed to putting “planning reform at the very centre of our economic and our political argument”. Labour intends to streamline planning applications and devolve more power to local governments who, it believes, are better placed to fast-track high-value applications. Labour has also pledged to reintroduce mandatary local housing targets, employ more people to tackle backlogs and bring forward the next generation of new towns, Casali explained.
Henderson pointed out that Labour’s commitment to house building could benefit companies with large landbanks. He also thinks a Labour victory would be a tailwind for the construction and infrastructure sectors.
“Labour governments have traditionally been good for domestic infrastructure companies, but infrastructure investment is needed regardless of who wins. We need new schools, prisons and hospitals,” he said.
“This could benefit contractors, as these are the companies likely to be out there with the diggers on major projects. But a lot of that’s priced in already.”
Strategic investment in green energy and other priority areas
The shadow chancellor has coined a new term, ‘Securonomics’, to indicate the economic and political stability that businesses need to invest with confidence.
Casali explained: “Labour believes that by improving the information flow to firms through ‘partnership’ with the government, as well as providing strategic direction and selective policy intervention, firms will be encouraged to invest their capital.
“In short, Labour wants to direct business investment to areas it believes the UK will have a strategic competitive advantage, e.g. green technology.”