SUMMARY
While UK equities have historically been more impacted by global market moves, a post-election shift in fiscal policy may influence gilts and the British pound.
A year of elections – 2024 will see dozens of national elections across the world, including a General Election in the UK, likely in Autumn, according to Conservative leader Rishi Sunak. Polling data indicates a likely Labour victory; if so, what, could this mean for markets?
Equities have been largely politically agnostic – History has shown that the political philosophy of a UK Prime Minister (PM) and the manifesto put forward by their party have only limited bearing on the performance of equities. Instead, returns typically mirror those of global equities, unless there are significant shocks affecting the country in a durable manner and the policy response differs materially.
Gilts & Sterling – The government bond and foreign exchange markets tend to be more reactive to fiscal and monetary policies than equities. Following the COVID-19 pandemic and the unprecedented amount of policy support impacting the economy, the surge of inflation forced global central banks to over-tighten monetary policy to defend the credibility of their inflation target, triggering a surge in bond yields. With inflation softening rapidly, we expect a meaningful rally in the bond market and envisage the Bank of England (BoE) to start rates cuts in the late spring or early summer of 2024 at the latest.
Relationship between monetary and fiscal policy – We believe that the most important variable likely to influence the price of UK assets will be any meaningful changes to the trajectory of fiscal policy following the parliamentary elections and whether the BoE will need to change its stance as a consequence. Currently, there is a slight incongruence between the expansionary fiscal impulse of the Conservatives, eager to revitalise the UK economy and consequently reignite support for the party, and the BoE’s desire to tame inflation, even if this results in the UK slipping into a recession in the coming year.
