In this latest Market Watch from Premier Miton’s Chief Investment Officer Neil Birrell, he discusses whether the impending election could throw the UK market off course and what opportunities and threats this may throw up for investors.
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May – in brief
- We’re off; in a surprise announcement, the general election has been called for 4 July.
- Interest rate cuts look to be imminent, but probably not in the UK or US.
- Financial markets remain relatively immune from problems that persist in the world, including a US Presidential candidate who is a convicted felon.
There is no hiding place
2024 is the year of the popular vote, with around half the world’s population able to go to the polls. It has all seemed a bit surreal so far, with nothing of genuine note happening. However, it has become very real, very quickly this month, with the Prime Minister surprisingly calling the general election at home for 4 July. There will be no escaping it, with politics dominating every media outlet 24 / 7 and many conversations around the country.
You won’t read any political thoughts here, but the ramifications for the UK economy and investment landscape in the short, medium and long term could be meaningful, so I will comment on those.
Firstly, the economy. If you have read this note or others we have produced recently, you will know that we, as an investment team, have become more positive about the outlook for the UK than we have been for some time and that remains the case. The question is; will the result of the election throw that off course?
Will the economic outlook change?
Inflation has come down nicely, heading back towards the 2% target. It was never going to be a smooth path, but the signs remain good. Indeed, April’s retail sales were a lot lower than expected, which is a good sign for inflation slowing further. The strength of the economy has been surprising, in a good way, as well.
Given the state of public finances, there is a limit to what a government can do in terms of spending. It would need to raise taxes to spend more and that risks damaging the consumer sector, which could be fragile if pushed. Raising corporation tax could be a possibility, but that risks companies deciding to base themselves in countries with friendlier tax regimes. So far, both the Labour and Conservative parties have been vocal on their policy on taxation; it is a hot topic politically, but also a crucial economic one. For now, anyway, higher taxes seem to be not too much of an issue.
The government could borrow more, in order to spend, but borrowing is much more expensive now, with interest rates where they are, which could take public finances to a dangerous place. At a time like this, the fear might be that a Labour government would spend more, financed by higher taxes or borrowing. But we have heard Shadow Chancellor Rachel Reeves tell us that she will “never play fast and loose with our money” and that Labour will be guided by a commitment to “sound money” in a style that would be akin to that of Margaret Thatcher administrations. These are comforting words but they also tell us that there is little other option.
What could be the impact on the stock market?
Firstly, and again, as you will have heard from me previously, the UK stock market looks attractive by historic and international comparison. Furthermore, we are in the midst of a glut of takeovers of British companies from a range of buyers.
At the highest level, there does not look to be too much that the election will result in to throw the rosy outlook into doubt. However, it’s within the stock market that we need to look to find opportunities and threats. To start with the latter of those; industries that used to be state owned and are now in private hands, may come under scrutiny. For example, a Labour government may look to change the structure of the railways when the licences expire for the various operating companies. Similarly, the provision of gas, electricity and water are regulated, the approach to those industries could change as well, all having an impact on the share prices of the companies involved.
There are many other industries that could be impacted by a change of government, indeed that could be the case even if there isn’t a change. Some possible change we might see could include planning laws and the housebuilding industry, the education sector as VAT is added to private school bills, regulations around electric vehicles and emissions and regulations relating to the financial services industry. A small example in financial services would be the introduction of a Great British ISA, something for which Premier Miton has been the lead advocate; it would have clear benefits for the economy, the stock market and the industry.
Overall, there is plenty for us to consider in the details, but maybe the biggest factor is certainty. Investors, in aggregate, hate uncertainty. In the days after an election that starts to fall away, which is good news.
Did anything else happen in May?
The persistence of inflation and the reticence of central banks to cut interest rates too early, in case it gives inflation a new lease of life, has meant that we are unlikely to see them cut until nearer the end of the year in the US and maybe also in the UK, although the US Federal Reserve Bank’s preferred measure of inflation, personal consumption expenditures, was lower than anticipated. However, the European Central Bank has openly talked about a cut at its meeting on 6 June. It would be good to see the peak behind us and look forward to the rate cycle turning elsewhere as well.
Financial markets, overall, had a good month. Stock markets did well in most areas, led by the US. Bond markets had a good time also.
In other news
Turning back to politics, it really is difficult to know how the conviction of Donald Trump will impact the US Presidential race, but we have a bit of time to worry about that and we have the distraction of our own election to focus on.
Artificial Intelligence (AI) remains a key theme in financial markets and the wider economy, it has been a major driver of the share prices of companies involved in its development, none more so than Nvidia, which is the global leader in manufacturing the semiconductors that power AI. In May, Nvidia’s share price hit a level that meant it was valued at more than each of Korea’s, Australia’s and, indeed, Germany’s entire stock markets!
