UK election: the calm before the … calm?

Since 22 May, the 7IM Investment Team has been braced for incoming questions about the impact of the UK election. We’ve been ready to reply – to talk about markets and manifestos, or polling and portfolios, or Farage and finance.

And… nothing.

OK, not quite nothing – but we haven’t had anywhere NEAR the amount of UK election-related questions from our clients as we received in 2010, 2015, 2017 or 2019. And, similarly, we haven’t seen the normal amount of commentary around the industry from the various think tanks and research houses and investment firms.

We’ve always said that over the long term, investors shouldn’t worry too much about the investment implications of political change (although the financial planning impact is definitely worth a conversation with an expert). But usually, during an election, it becomes easy to forget that. Not this time, though.

What’s changed? Why are UK investors and UK-related markets so calm?

Basically, it’s the lack of surprise and the absence of uncertainty.

First, there’s timing. There was always going to be an election in 2024. Whether that was summer or autumn wasn’t really a market mover; on the date of the announcement (22 May), the Pound rose slightly against the Euro (see below chart); markets vaguely welcomed the clarity of finally having a date.

Compare that to the uncertainty created by Monsieur Macron in recent weeks (on the same chart). The Euro fell meaningfully; markets disliked the surprise and uncertainty created.

Source: Bloomberg/7IM

Second, there’s the outcome. Financial markets are most volatile when there are multiple likely outcomes, and no real way to estimate the most likely. Brexit is the most obvious political great example, but the same applies to outcomes of lawsuits on mergers, or the impact of bad weather on commodities. But with Labour leading the polls so strongly, there’s little doubt of the outcome.

Third, there are the policies. If one party were the likely winner, but had a LOT of radical policies, again, markets would get nervous. Liz Truss proved that in autumn 2022. But Labour’s policies aren’t particularly out-there. In fact, none of the major parties’ manifestos are wildly different on the major issues, so there’s no jitteriness.

So it should be no surprise that in terms of portfolios, we’re not seeing too much in the way of risks (or indeed opportunities). We believe that our properly diversified portfolios are well insulated in the unlikely event of any volatility arising.

• UK equities. As we always try to remind our clients, even assets which look like they’re exposed to the UK economy tend not to be. The companies in the FTSE 100 only make about 15% of their money here – and even the smaller FTSE 250 businesses earn half of their revenues abroad.
• Global equities. A UK election isn’t really an event from a global perspective. Ask Apple or Toyota or Nestle if it affects their corporate strategy… it doesn’t.
• UK bonds/Sterling. Unless there’s another Liz Truss moment coming, the big influence on Gilts and the pound will be the direction of interest rates, at home and abroad.
• Global bonds. Like global equities, the big influences are outside the UK borders. The global interest rate environment and global geopolitics are the important variables.
• Alternatives. Our underlying Alternatives allocations are as global as the rest of our portfolios, and designed to deliver returns which are less correlated with major market movements in the first place.

In fact, the 4 July elections shouldn’t really see any fireworks at all.