It has been a very busy fortnight dominated by news from politics, in the US, France and of course the UK with the general election yesterday
We have seen financial markets moving generally higher, with French assets seeing a little relief after the first round of the parliamentary elections while UK assets this morning are little moved at the time of writing (7am) on the back of the election, which is no surprise given a Labour victory was fully priced in.
The Labour Party have won the UK general election in a landslide with an expected majority of 170 – the biggest since Tony Blair won the 1997 election. This is the first Labour general election win for 19 years, and their first win from opposition for 27 years. Outgoing Prime Minister Rishi Sunak conceded defeat at 4.40am this morning, calling the result “sobering” and said he took “responsibility” for the party’s loss. The Conservatives are on course for the worst result in their 190-year history. Labour leader Sir Keir Starmer said the result was a chance for the UK “to get its future back” and the victory was a result of “being a changed party”.
The BBC forecasts Labour to secure 408 seats in the House of Commons with the Conservatives on 136, and Liberal Democrats on 66. The Reform Party are projected to win 4 seats and SNP 8 seats. The Labour majority of 170 represents a huge shift from 2019 election when Boris Johnson’s Conservatives won with an 80-seat majority. Bloomberg report turnout is a 100-year low at around 60%. The Financial Times report the Labour vote share is around 35%, lower than the 40% secured by Jeremy Corbyn in 2017. The Conservatives on around 23% (losing 236 seats) and Reform on 11%.
While Sir Keir Starmer will be the fifth Prime Minister in the past five years, the UK is now in a rather unique situation with a stable centre-leaning government and political certainty arguably for a decade given the size of the Labour majority that should allow for longer term policy planning. It is indeed quite a contrast with some of the UK’s European neighbours and of course the US faces several months of political and policy uncertainty ahead.
The next big date in UK politics other than the transition of power today and cabinet announcements over the coming days will be the King’s speech, scheduled for 17 July, which will give markets direction as to Labour’s key policy priorities for its first year in government, and some clues as to what will be included in their first fiscal event, expected to be in the autumn. A challenge the UK faces, along with the US and many eurozone countries is that the incoming government has limited wriggle room given the size of government debt accumulated in the aftermath of the financial crisis and the pandemic is now straining budgets as interest rates have normalised and the cost of servicing debt has rocketed. Equally, the marginal buyers of government bonds over the past decade – the central banks through quantitative easing – are now sellers as central banks seek to reduce their swollen balance sheets.
The new government has a fine line to walk in delivering their manifesto, including targeting economic growth of 2.5% a year, while faced with public finances that appear stretched and their own commitment not to raise taxes. Bloomberg surveys predict growth of just 0.7% this year and 1.2% in 2025. Debt is at the highest level in 60 years, close to 100% of GDP, with the tax burden close to record highs. Hence there are significant fiscal constraints for now and tough decisions on taxation and spending to come; arguably the government should address these issues sooner rather than later in the hope that the impact has been absorbed long before the next election. Details on their plans to stimulate growth so far are limited but the government will have to enact supply side reforms to drive growth and productivity to meet their manifesto commitments. We may not learn a great deal detail more in this respect until the autumn Budget.
UK equities remain lowly valued compared to some international peers and their own history, and the optimistic view of the election outcome is that it represents a tipping point. With the UK economy seeing a reasonable bounce from the shallow recession last year, household incomes stabilising as the worst of the cost-of-living crisis recedes, an interest rate cutting cycle on the horizon as inflation falls to a level the Bank of England is comfortable with, and political certainty after the traumas of the past decade there are reasons for investors to take a more positive view on UK assets.
The first round of the legislative elections in France took place last Sunday, with the Rassemblement National (national rally) party of Marine Le Pen taking the largest share of the vote with 34.5% of the vote, against the left-wing coalition on 28.5% and President Macron’s centrist alliance on 22.5%. The second round of voting will take place this Sunday in seats where no candidate took over 50% of the vote. Parties have been co-operating to ensure that the National Rally candidate is defeated in the run-off with some candidates withdrawing to ensure the anti-far right vote is not split in a three-way fight. The prevailing view for now is that this co-operation will stop the National Rally from securing an overall majority, i.e. 289 seats or more, but they are likely to be the largest party in a hung parliament and Marine Le Pen has said they will try and form a minority government. The consensus expectation is, assuming National Rally cannot find any support or co-operation from other parties, President Macron will therefore preside over a gridlocked legislature for his final three years in office.
Meanwhile in the US, the first television debate between President Biden and former President Trump went very badly for the incumbent, whose performance weakened his chances for securing a second term and raised further questions over his age and his capacity to govern for another four years. President Biden called an early debate to try and change the trajectory of the election, but his performance, which the Financial Times described as ‘halting’ suggests this debate was an own goal. Biden said it was “hard to debate a liar” and blamed “jetlag” for his lacklustre performance. Talk of replacing Biden as the Democratic nominee has increased significantly but the timeline and process for this is difficult, not least because there is no candidate well placed to replace him at this stage from a recognition and funding point of view. That said, Vice President Kamala Harris is the best placed substitute, and prediction markets now point to a strong probability of Harris being the candidate rather than Biden. The national opinion polls point to a marginal shift towards Trump but it appears that political allegiances are already firmly entrenched, and of course Biden already trailed Trump in the key swing states. There was no notable market reaction given markets had already been pricing a Trump victory with the debate performances only cementing this view. UK politics may be entering a new era of certainty, but the same cannot be said for elsewhere….
