Weekly Market Update -9th July 2024

Although last week’s landslide election victory for Keir Starmer’s Labour Party might have marked a seismic political shift, the initial reaction from markets was somewhat muted.

This was perhaps due to strong polling in the months leading up to the election, allowing investors to effectively ‘price in’ the anticipated election results.

Nevertheless, the scale of the victory has dealt Starmer a strong political hand. Labour ended with 411 out of a possible 650 seats. This commanding majority should, in theory, allow them to implement their manifesto promises. After a relatively rapid series of Prime Ministers since 2016, greater political stability will also be welcome.

That said, the new government is likely to face some significant economic challenges. Although the economy is no longer in recession and inflation is back at 2%, the new Government has inherited an economy currently recording low growth, high levels of public debt, and with inflationary challenges remaining.

It’s likely we’ll get a feel for the Government’s plans in the coming weeks and months; however, the Autumn Budget will be one of the first real tests for equity markets to assess Labour’s fiscal plans.

For now, Sue Noffke, Head of Equities at Schroders says the business community seems relaxed about the prospect of a Labour Government. She notes: “The mini-Budget blowout in 2022 showed how poor economic management can negatively impact investor confidence and UK assets.

“It seems bizarre to say this, but it’s probably helpful that we had that blowout, and I think the market knows this too. It has shown everyone what’s not possible and the chancellor-in-waiting Rachel Reeves seems to have really taken the lessons on board.”

Specific market sectors in the UK look likely to benefit from the new Government. Examples include infrastructure and defence industries, given Labours promises for these areas. Friday saw shares of a number of UK house builders jump on the potential 1.5 million new homes Labour promised would be built in the next five years. This ambitious target will likely require changes to planning regulations, so may take some time to come to fruition.

Ultimately, Sarah Ruggins, Head of Investment Specialists at?St. James's?Place, noted: “Overall, it’s important that - despite their increased confidence – investors do not get ahead of themselves by making any rash, short term portfolio decisions in response to today’s news. Not only are specific policies still somewhat unclear, but our recent analysis of UK market performance data spanning the past 10 UK elections, from 1987, found no clear trends between election outcome and market performance. Investors should take this on board and adopt a long-term approach to investing, which refrains from trying to time the market, and instead focuses on building a diversified portfolio across asset classes and geographies, tailoring this to meet specific return and risk objectives.”

The UK isn’t the only country going through an election. The French Parliamentary election has proven far more unpredictable that the UK one. Last week was challenging for European equities after the first round of voting suggested the far right National Rally party would become the largest party.

However, as the week progressed, the centre and left parties agreed to work together, to avoid splitting votes. Over the weekend it was confirmed this, plus a higher-than-expected turnout had helped the left wing New Popular Front win the most seats in the second round of voting, followed by Macron’s centrist Ensemble party. The National Rally ended third.

Although this will result in a hung parliament, markets have reacted positively to the surprise news. The French CAC 40 has recovered 2.62% in local currency, recouping the previous week’s losses.

Finally, the US, which is facing its own election later this year, saw the S&P 500 up 1.95% and the NASDAQ Composite up 3.5% last week. This was despite a shortened week thanks to the Fourth of July holidays. Growth was helped by strong performance from a few larger companies, including Tesla, Apple and Meta. Meanwhile weaker economic data was released, increasing the likelihood that an interest rate cut will be coming sooner than later.