Despite the historic nature of last night’s general election, few could claim to be surprised by the results. For months now, opinion polls and political commentators have been pointing to a considerable victory for Sir Keir Starmer’s Labour Party. So it has turned out.
With the verdict now in, what should investors be thinking today?
First off, investment history shows that domestic politics do not tend to be a major driver of performance most of the time. Despite this, the general perception persists that markets favour Conservative-led governments over Labour ones.
Yet, although this is of course an extremely short-term view, at the time of writing on Friday morning there is no sign of market concern at the result. The UK’s benchmark stock market indices are both trading higher – more than 1% up for the FTSE 250 index of mid-sized companies with greater exposure to the UK economy – while the pound is slightly higher compared with the US dollar and the euro.
There are arguably three main reasons for the calm we see this morning – which we expect will persist:
- The chastening experience of the sharp market reaction to the Liz Truss ‘mini-Budget’ is still fresh in everyone’s minds. No politician or party will be in a hurry to repeat that experience by putting forward plans for considerable extra borrowing – and the markets know it. Indeed, what we know of Labour’s policy platform calls for similar overall spending plans to those of the outgoing Conservative government and a commitment to the same target on cutting government debt
- Labour’s wider policy platform has, by design, been rather modest and business-friendly. For example, the party has pledged not to increase Corporation Tax or most forms of personal taxation; as well as to retain recent cuts to National Insurance and taxes on business investment
- After almost a decade of turbulence in British politics – with referenda, elections and prime ministers aplenty – a new government with a large majority may well herald a period of stability and greater certainty, something markets typically welcome
It is also worth bearing in mind that after a few very challenging years, in which factors including the pandemic and the tragic war in Ukraine conspired to deliver us a cost of living crisis, things are once again looking up for the UK economy:
- Economic growth in the first quarter of the year was stronger than that seen in France, Germany, Italy, Japan and even the powerhouse United States
- Inflation – which peaked at an annual rate above 11% in October 2022 – is back down to the Bank of England’s 2% target. The Bank of England is likely to begin cutting interest rates soon as a result, further easing pressure on people’s finances
- Unemployment has stayed well-contained, while wage growth even when taking in inflation into account has been positive for around a year now
As we continue to watch developments unfold on this dramatic day, for these reasons we do not believe investors need be concerned about the election result. Ultimately, as is usually the case, staying the course is likely to be the favourable option. Let the headlines come and go, while the wide variety of companies represented in a typical investment portfolio get on with the job of making the owners of their assets money over the long-term.
As ever, if you do have any questions or concerns about how events may affect your finances, your Furnley House financial adviser would be happy to hear from you and to talk them over.
