Navigating Rates

A long time in politics

It is often noted that a week is a long time in politics, and with elections in the UK and France in recent days the expression has rarely been truer. With the UK results now clear, what conclusions can investors take?

Rishi Sunak’s gamble on an early UK election did not pay off. As widely expected, the opposition Labour party won a convincing majority on 4 July. Its leader Sir Keir Starmer becomes prime minister and should be able to enact the legislation he wants through Parliament.

Stock markets might once have taken fright at a Labour government. However, there are two reasons why things are different this time. First, the party itself has shifted significantly to the centre of the political spectrum, signalled by its policy statements and election manifesto.

Second, as the short-lived Liz Truss government showed, investment markets have power over governments that rely on bond market financing. If Labour moved to increase the UK budget deficit further, a similar bond market reaction would likely ensue.

This is why Sir Keir and his shadow finance minister Rachel Reeves preached a message of fiscal prudence throughout the election campaign. They will likely follow the playbook of the Labour victory in 1997 – which heralded 13 years of power – perhaps eyeing up a similar tenure in government. Within weeks of that victory, the then finance minister Gordon Brown introduced the UK’s first formal fiscal rules.

The current stability in the UK contrasts with the political volatility elsewhere. In both the European Union and the US, events have conspired to bring uncertainty to the geopolitical and economic paths ahead:

  • With the second stage of voting in the French elections taking place on 7 July, there is likely to be discord between President Emmanuel Macron and the government, and equity and bond markets have responded badly to the unfolding situation.
  • In the US, the result of the presidential elections in November matters for the world economy as the main candidates’ policies are likely to be very different, especially in matters of trade and geopolitics.

It is well documented that investors hate uncertainty, and the fact that the UK is a political oasis of calm compared to other markets is a big plus. In addition, we think its equity market exhibits low valuations versus history and other markets, inflation has returned to more normal levels, and we expect interest rates to normalise.

Where to look

We see some specific opportunities stemming from the change of administration in the UK:

  • We expect rules and regulations around planning permission to be quickly relaxed by the incoming government. Combined with likely cuts to interest rates in the coming months, this should present opportunities to the UK housebuilders, which investors have avoided in recent times.
  • Other global trends continue to play out. The electrification of the energy supply continues to progress, and this will inevitably require more copper supply. We find opportunities to invest in certain UK-listed mining companies with strong positions in the metal ore but which still trade at valuations we find attractive.
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