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News – 05.07.24
UK General Election 2024: Change begins now
We are promised that change ‘begins now’ and that this will be an ‘age of national renewal’, but how will this be funded? … Read more
Insight – 03.07.24
Trusts and US tax: The importance of trustee and beneficiary residency
Establishing the residence of a trust for US tax purposes … Read more
Upcoming event – 19.09.24
Trustee training: Impact management
Essential for trustees, learn practical insights for effective data use in decision-making and transparent reporting. … Read more
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Whichever party wins, they will inherit a difficult economic position. Both Labour and the Conservatives have pledged to limit borrowing and debt with only small differences expected in fiscal management. As a result, we might expect the overall stance of fiscal policy to end up very similar.
However, there is room for some distinction between the two parties. For example, Labour might prove more successful at increasing homebuilding, while the Conservative party policies may result in greater productivity. Either way, the UK’s economic growth rate is unlikely to alter much through government reform.
There is some scope for a new government to increase confidence in the UK economy, and household saving behaviour has still not returned to pre-pandemic patterns. If a change of government boosts confidence, encouraging spending and investment, we could see some positive impact on GDP.
Given the limited differences in expected fiscal management, we anticipate that the election outcome will have minimal bearing on inflation. UK inflation as measured by Consumer Price Inflation (CPI) slowed to 2% in May, falling to the Bank of England’s target for the first time in nearly three years as food price rises eased sharply. However, figures did show that service inflation is still rising too fast, remaining at around 6%. The cost of services has increased much more significantly than the cost of goods, and the service sector makes up a significant part of the UK domestic economy.
An August interest rate cut is still possible if pay rises and the price of services cool further. Rate cuts have long been expected, and the decision on when is unlikely to be dictated by politics, but instead inflation and wage growth data over coming months.
One August event that may potentially have an influence on rate cuts is the return of Taylor Swift to Wembley (stay with us on this one…). There has previously been some expectation that the Bank of England MPC will cut rates from 5.25% to 5% with a further cut later in the calendar year. However, the Wembley dates also coincide with some key inflation index days. Estimates vary widely but increases in hospitality costs alone of between 3 and 4% compared to previous months have been common in other countries.
By the time one factors in other costs such as transport, food, shopping, and travel, it is not beyond the realm to expect an increase in service inflation – particularly when considering the 15 dates alone between June and August will add circa. £1bn to the UK economy. In the short term, a political party is unlikely to have a similar impact!
The MPC will also be keen to demonstrate a lack of political bias, so this combined with the forces of Swiftonomics will mean an interest rate reduction seems unlikely in the short term.
UK investors have become accustomed to political drama, yet the election may not prove to be particularly volatile for markets. Inflation figures prompted a greater market response than the election announcement itself at the time.
Nonetheless, since the disastrous Truss ‘mini’ budget, sterling and bonds remain sensitive to any signs of fiscal ‘indiscipline’. Consequently, the danger remains that if parties cannot offer credible plans for public spending cuts, or they propose radical tax cuts, we could still see elevated gilt yields, even as interest rates fall.
We can expect some ‘noise’ as policies are announced, however, changes in US and UK interest rates are likely to have a more meaningful impact on the exchange rate. Given the commitment to have the Office for Budget Responsibility (OBR) review policy detail, it is unlikely that we will see much detail on policies or significant changes until the Autumn. With the Bank of England not expected to change its plans as a result of the election, the overall implications for sterling should be limited.
It’s natural for investors to look for a connection between the party in power and the direction of the stock market. Any new government will want to take account of the economic environment when they come to power before making decisions, so the reaction of the UK stock market to previous governments may provide a clue for investors.
The graph below shows the growth of £1 invested in the UK market over more than 60 years and 13 prime ministers (from Anthony Eden to Boris Johnson).
Source: Dimensional Fund Advisors Ltd
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants, including expectations about the outcome and impact of elections. While unanticipated future events may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So, it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a general election.
The focus of each election changes but predictions about the effect on the stock market focus on which party will be ‘better for the market’ over the long run. There is no obvious pattern of long‑term stock market performance linked to the party who has the majority in the Commons or any significant reaction post-election. What it shows is that over the long run, the stock market has provided substantial returns regardless.
Government policies may have some impact on market returns, but so do many other factors, including the actions of foreign leaders, interest rate movements, changing oil prices, and technological advances. The bigger picture is that stock markets have rewarded disciplined investors over time and, changing strategy based on one factor is unlikely to be fruitful. It is also worth reminding ourselves that the UK stock market makes up less than 4% of global markets and factors here are likely to have minimal effect on a globally diversified investment portfolio.
Financial planning and investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes. As such, there is a strong case for investors to rely on patience and disciplined portfolio structure, rather than trying to outguess the markets. However, it is sensible to review one’s planning in light of potential changes to allowances when there is a clear need to increase tax receipts.
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Buzzacott Financial Planning is authorised and regulated by the Financial Conduct Authority. This article has been prepared to keep readers abreast of current developments. Professional advice should be taken in light of your circumstances before any action is taken or refrained from. The value of investments, and the income from them, may go down as well as up and investors may not get back the amount originally invested.
