Facing Election Rejection?

It feels an eternity since the UK European Union membership referendum in June 2016 and many of us will be scratching our heads trying to identify any positives.

From a global investment perspective, it does also feel as if  the UK has been ‘wading through treacle.’ Following Boris Johnson’s landslide election victory in December 2019, the UK looked set to capitalise on Brexit ‘opportunities.’ Sadly, only to be hit by the global Covid-19 pandemic and then the Russian invasion of Ukraine, which exacerbated the cost-of-living crisis with higher energy and food prices.

The UK also experienced a period of political chaos during this period and most voters could be forgiven for losing track of the number of Conservative Prime Ministers and Chancellors. Things came to a head in September 2022 with ex-PM Liz Truss’s attempt to undertake large ‘Reagan-style’ unfunded tax cuts, at a time of the highest inflation in 40-years. Sterling collapsed, gilt yields spiked, the Bank of England was forced to intervene to avoid a pension crisis and business confidence was dented.

Roll on 8-months and the UK political backdrop is starting to stabilise. Furthermore, the self-inflected crisis in the SNP seems to have eliminated any serious risk of Scottish independence and UK break-up for the foreseeable future. Meanwhile, PM Rishi Sunak’s efforts to settle the Irish border dispute appears to have put the UK on much better terms with the EU as well as the US.

Both the UK’s main political parties appear to have sensible mainstream leaders in Rishi Sunak and Sir Kier Starmer. At the very latest, the next general election is not due until 28^th January 2025, although many political pundits expect an election to be called in Autumn 2024. The Labour party will no doubt be feeling much more confident following the recent local election results and with the SNP’s 45 seats in the House of Commons up for grabs, Sir Kier must be feeling confident of taking power with a sizeable majority.

As the September Truss/Kwarteng mini-Budget crisis showed, global investors hate irresponsible fiscal policies and political uncertainty. The UK is doing better now because of the return of predictable leadership, which in turn should help business confidence. Nevertheless, disappointing inflation data has seen UK Gilt yields rise to levels like last September, a concerning development, but largely an issue for the Bank of England. Hopefully, the UK Government will stay the course in terms of sensible policy and avoiding deeply flawed ideas such as price controls on food. Although, the scope for politically motivated pre-election tax cuts, appears slim.

Let us not forget that 2024 will also see the US Presidential election in November. Joe Biden is already the oldest president in American history, his re-election is not certain and wouldn’t suit everyone. It will be even more important globally for China/US relations, the war in Ukraine and for Biden’s US inflation Reduction Act. Could we really see a return of Trump tweets and America First?

What have we been watching?

A tale of two cities? US equities had a strong week on debt ceiling hopes but more so due to a surge in US AI tech stocks. AI chip manufacturer Nvidia jumped 24% in a day adding £150bn to its market value on what was described as a ‘game changing’ trading update. By comparison, UK equities had a disappointing week, despite the IMF upgrading its UK GDP growth forecasts. ‘Sticky’ inflation data, expectations of even higher interest rates and rising gilt yields combined to create uncertainty.

At least markets have been able to breathe a slight sigh of relief today given the weekend progress to suspend the US debt ceiling to January 2025, ahead of a vote tomorrow. This should not come as great surprise, given the history of these negotiations and ability to ‘kick the can down the road.’ However, ultra- conservative Republicans felt House speaker Kevin McCarthy should have secured far deeper spending cuts, while left-wing Democrats sound equally unhappy that President Joe Biden agreed to any spending limits at all.

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In the UK, the 2-year gilt yield ended the week not far below 4.5%. This followed the latest inflation data. While headline inflation was well down at 8.7% in April this was still higher than had been expected. More alarmingly, core inflation increased from 6.2% to 6.8%. If this was not bad enough, the situation was made worse by Bank of England governor Andrew Bailey saying that its forecasting model is broken! UK interest rate futures are now predicting a further 1% hike to 5.5% by the end of 2023. The Bank of England’s floundering performance over inflation is looking as toxic as the Liz Truss-Kwasi Kwarteng mini-budget last year!       

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In Europe, German first quarter GDP was revised down, contracting by 0.3%, following the 0.5% decline in the fourth quarter of last year. So Germany, is the sick man of Europe having been in recession although not a surprise for markets given its heavy manufacturing weighting in the economy and exposure to Russia and China.

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In the US, the main news was the agreement over the weekend on the debt ceiling. Meanwhile, the Federal Reserve’s preferred inflation measure – PCE deflator, was in line with forecast at an annualised rate of 4.3% in April.

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Japanese equities closed last week at a thirty- year high which followed the recent strong first quarter economic growth data.

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Brent oil was broadly unchanged at $76 as concerns about China’s economic growth continued to overshadow.

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Finally, fancy an expensive but exclusive staycation? UK holiday village chain Centre Parcs has been put up for sale by its Canadian private equity firm owner, Brookfield. Yours for the bargain price of between £4bn-£5bn. Brookfield bought the business for about £2.4bn in 2015. Centre Parcs has benefited from staycations and while us Brits still love our holidays more of us are heading overseas for the weather so it will be interesting to see what value potential buyers place on Centre Parcs.

Read Last Week’s Alpha Bites – Bulking Up

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.