For a number of years we have highlighted that the UK stock market is cheap, but investors, particularly global investors, lacked the confidence to commit funds. Will the election of a Labour administration led by Keir Starmer make any difference?
For the last 6 months the now Chancellor, Rachel Reeves, has been meeting big financial institutions to give a sense of what lies in store. She certainly didn’t scare them – the UK stock market has been steady, and the bond market did not beat a hasty retreat on fears of reckless over-spending.
The actual result contained no surprises. Bond markets were unmoved, and the domestically orientated stock market indices (e.g. FTSE 250) edged up. The election result was a ‘known known’, and investors like certainty and stability, in stark contrast to events in some EU countries and France in particular.
Confidence is key. Confident UK and global investors will be more inclined to invest into what some believe is the cheapest market in the world, bringing it back from the wilderness, as one fund manager put it.
This will undoubtedly be helped if there are interest rate cuts in August.
A key component of that growing confidence is a sense of stability. “Investors are now placing much of their faith in the character of the man; steady, predictable, and a little boring” said one fund group, and they continued “he is aware of the mistakes made by Liz Truss in trying to do too much too quickly, so it would be a huge surprise to see reckless fiscal announcements early in this Parliament”.
“Early” is the operative word. By the time of the Autumn Statement in November we should have more clarity, because policy initiatives are needed across a broad range e.g. housing, health, technology, infrastructure, energy, education. Labour will have plans that need funding, and the best way to do this is encourage growth which will in turn generate a higher tax take. Without growth, and a bigger tax take, the alternative is crippling rises in tax rates, which will hit growth, and cause turmoil in stock and bond markets as recession looms.
There will be a big spotlight on the approach of this Government to the desperate need to raise the growth rate of the economy.
In the meantime, one early indicator of a change in mood is takeover activity (mergers and acquisitions), which have been steadily growing for over a year, with the emphasis on smaller companies. A continuation of the same, and with more action within the FTSE 100, would be very positive for investors. Yet again confidence is key, as acquirers need to have a good feeling about the future, as well as the maths suggesting there is a bargain to be had.
Similarly with UK consumers, where there are considerable surplus savings which could be converted into spending if the mood music is more positive.
Come November, if the ship has stayed steady in the meantime, there are a range of potential positive wild cards, such as requiring UK pension funds to have a specific amount invested into UK companies, or a new Help to Buy on housing, to accelerate housing new builds.
According to another fund group:
“Historically, sizeable parliamentary majorities have coincided with periods of above-average economic growth. For UK equities, this victory could signal a long-awaited resurgence.”
Our view of the history of elections and their impact on markets is not as enthusiastic, but it is certainly not negative.
One additional component at the moment is that the new stability in the UK is in stark contrast to other Western countries. The US stock market is not just horribly expensive, but the November election is an obvious source of instability. More recently some component nations of the EU seem intent on stoking fires of instability e.g. France is becoming ungovernable, and the German economy is struggling, encouraging talk of it being the new “the sick man of Europe”.
Taking all of this together, it certainly makes “the worlds cheapest stock market” look attractive – the vast sums washing around the world have to go somewhere.
For example, in the week before the election, one investment house reported a net inflow of £276m, 20 times the amount in the week after the election was announced.
There are some excellent UK-invested funds which are very well positioned for the period ahead, and they feature in our discretionary portfolios.
The risks? There are always risks, and the most obvious are, perhaps surprisingly, beyond the UK, as mentioned above.
Apart from these concerns, and unknown unknowns, perhaps we can allow ourselves to be modestly positive for now.
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