ELECTION UPDATE

We first drafted this piece two days ago (please forgive us if there are any short- term inaccuracies). This is an illustration in how much can change in such short order.

The UK equity and bond market now has its mandate from a left of centre party. Interestingly, Europe is experiencing a resurgence from the right. Emmanuel Macron’s hasty decision to call a snap election following a poor night for him in the European elections has been followed up by a similarly poor night in the first round of the French parliamentary elections. Only the complex machinations of their electoral system and some significant deal-making between two parties who would never hitherto have considered such an alliance will keep National Rally from winning a majority and being the first hard right-wing party to run a government in France since World War II.

One could observe that the French are becoming used to this. In the first round the electorate chooses their favourite candidate. In the second round, it is about tactically stymieing the candidate the electorate collectively likes least. However, at least this system proffers the opportunity for the French to have at least one round where they can vote positively. Listening to and reading much of the discourse within the British media, voting for the least bad candidate appeared to be our status quo. This notion is only amplified in the United States where they have another four months of electioneering to endure which, if last week’s Presidential debate is anything to go by, could make for a really turgid run-in to November 5th.

The commentariat has not coalesced around a central hypothesis of the immediate fallout of the Labour majority. There is more confidence in the current Labour party than there was in 2019 when Investment Commentary – JUNE

Jeremy Corbyn was the party’s leader. The likelihood is we will see some benign signposting of any likely changes to statute prior to summer recess before the heavy lifting starts and kicks off in earnest in the Autumn Statement. Any more aggressive changes to fiscal policy not already mentioned in the Labour ‘fully costed’ manifesto may be met with derision from sections of The City. Indeed, the Institute for Fiscal Studies claimed the UK electorate would be voting in a ‘knowledge vacuum’ as neither of the main parties actually explained how they would pay for their spending promises.

We will ensure your portfolio remains nimble and well diversified, which, during periods of such geopolitical volatility, is the best reassurance we feel able to give.

MARKETS AND ECONOMICS

Prior to Macron’s snap election call, US markets were flirting with their all-time highs, with technology (again) leading the way. During the last 18 months, the US technology sector has doubled while the remaining US market constituents (S&P ex-tech) have grown by 24% in value (Bloomberg). Much of the growth has been in the artificial intelligence (AI) sector with Nvidia stock experiencing share price growth of 138% this year. Towards the end of June, the company did suffer a ‘blip’ which saw $430bn of market value evaporate in three trading sessions: the most ever for a single stock.

After a strong first half of the year for equities – many markets, including the FTSE100 hit new all-time highs – it is not usual to see a period where prices soften into the summer months. These seasonal deviations usually manifest in incremental reductions in share price values on low volume between June and October, although pinpointing the specific periods is very difficult. In a year where we have an election in early July, how quickly markets move and volumes dry up will depend on the scope of the proposed changes to fiscal policy by any new government: anything too aggressive early on could mean busy and volatile markets throughout the summer.

Wider sentiment appears to be broadly positive in spite of some of the uncertainties in geopolitics and mixed economic data. UK bond volatility is the lowest it has been in two years although some are expecting this to change if there is a Labour landslide as investors price in higher risk for long-term gilts.

Should UK CPI inflation continue to be at or around the 2% target, the Bank of England is likely to cut interest rates at least once in 2024 with the International Monetary Fund (IMF) predicting UK rates to be 3.5% by year-end 2025. Much can change in 18 months, however, after such a painful period of rising prices and rates throughout 2022 and 2023, interest rates between 3% and 4% could be latterly seen as the process of ‘re-normalisation’ back to pre-financial crisis levels.

The Fed may be a little more hawkish than the European Central Bank (ECB) and the Bank of England as CPI inflation there has been more stubborn (currently 3.3%). They would see sequential cuts to interest rates being followed by any period of ‘re-raising’ as a seismic policy failure.

OUTLOOK

We maintain our cautious optimism for the medium-term. Shorter- term, as explained above, we feel markets could exhibit some volatility until the political picture becomes more certain. However, through diversification, we hope to mitigate any sharp drawdowns in risk assets with exposure to gold, high-quality fixed interest investments and absolute returns vehicles, which can profit from falling prices.

Should geopolitics become more settled after the US Presidential elections, we may look at re-introducing higher equity weighting at the expense of some of these safe haven assets. This would probably happen gradually and not without significantly more conviction than we presently have about the economic and geopolitical backdrop.

Thank you for your continued trust and confidence.
Warm regards,