Things can only get better

“Things can only get better” is a track sung by Northern Irish band D:Ream. Originally released in 1993, but it was in 1997 that it really hit the headlines, as the official anthem of Tony Blair’s Labour Party and their landslide victory.

Roll the clock forward, and the track is once again in the spotlight. On the 22^nd May, it was played over a background tannoy system when Rishi Sunak delivered his snap election speech outside 10 Downing Street, as he was being drenched by a shower.

In a strange twist, the well-known Professor Brian Cox joined his former band, D:Ream, on stage at Glastonbury over the weekend!

What does the future hold?

Based upon current polling trends, by the end of the week, the UK will have a new Labour Government with a very large majority.

What will this mean for the UK stock market?

Outside of a forlorn looking Rishi stood outside No 10, the last 10 years will be remembered for Brexit, the Covid-19 pandemic, the Ukrainian conflict, energy shock, cost-of-living crisis, political instability and sadly the fiscal mayhem of Trussonomics!

These events have not helped the perception of the UK, amongst global asset allocators. In addition, UK equities have suffered from the global shift to passive investing, a long-term trend that has been accelerated by current UK regulation. Over-riding these issues has been interest rates, where sticky services inflation has deferred interest rate cut expectations.

The fact the election has been brought forward 3-6 months is likely a positive, as it removes a known-unknown. We know some of Labour’s plans such as higher for longer North Sea taxes and non-domicile tax. Commitments not to re-introduce the lifetime cap on pensions and ruling out tiering of bank reserves at the Bank of England (BoE), would tend to suggest that the centre of the Labour party is leading on policy. Over the weekend, news broke of a promised swift ”building blitz” and a review of the green belt land. This will not be music to suit everyone’s ears.

A credible post-election plan, political stability and perhaps a less fractious relationship with the EU, might all help the perception of the UK amongst global investors.

At least UK businesses should be able to make longer-term investment plans with greater confidence. There is still a record high tax burden and further tax increases of some form are likely, given the pressures on the NHS and social care services. The key will be UK economic growth and whether this could prove to be better than the Bank of England (BoE) is forecasting. This is possible, if consumers start spending their rising incomes and elevated savings.

An interest rate cut from the BoE before the Autumn, would also be most welcome.

Unfortunately, from a stock market perspective the regulatory driven shift to passive investing is unlikely to change but, the UK should be more attractive to overseas investors. Overseas companies and private equity investors are still trying to takeover UK businesses which shows that the UK is undervalued. Encouragingly, more international investors are showing up on shareholder registers. Many UK companies continue with share buy-backs and hopefully with the election over, new issue activity should pick up.

At least the UK should now enter a period of political stability, but will this in turn lead to economic growth and a recovery in the economy?

Many would d:ream of political stability, with other countries facing key elections; such as France and more importantly the US. 

What have we been watching?

Too many election debates, party political broadcasts and stressful England matches! From polling it looks as if Rishi Sunak, just like Gareth Southgate needs a miracle last-minute goal to save his career!

Europe was overshadowed by the French election rather than that in the UK, while the US saw the first presidential debate between Donald Trump and Joe Biden which has raised serious questions about the latter’s ability to govern. The US market saw massive volatility in AI chipmaker Nvidia which recorded three days of losses before rallying. At one point it dropped 10% from its intra-day high – not the sort of volatility you want in the world’s biggest stock and given it is larger than most European stock markets! Otherwise, there was a reminder for markets of the challenge of sticky inflation with data from both Canada and Australia surprising to the upside.

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The UK PMI Manufacturing activity indicator continues steady growth increasing slightly to 51.4 in June, a 23-month high but PMI Services fell to 51.2 due to the rising cost of living. UK GDP for the first quarter of 2024 was also revised upwards slightly to 0.7%.

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In France, the far-right is in pole position after the first round of parliamentary elections. Marine LePen’s National Rally party won 33% of the vote, with a far-left alliance behind on 28% and Macron trailing in third at 21%. The second round of voting is on 7^th July.

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In the US, the PMI Manufacturing activity indicator rose slightly to 51.7 in June while PMI Services rose to 55.1, a 26-month high. Manufacturing activity in particular looks to have been supported by a combination of re-shoring of manufacturing, Inflation Reduction Act renewables investment and US defence spending for Ukraine. Meanwhile, the PCE deflator, the Federal Reserve’s preferred inflation gauge was in line with expectations in May.

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The Japanese Yen continued to sell-off leading authorities to warn that they are standing ready to intervene if there are any excessive currency fluctuations. The Bank of Japan has been actively supporting the currency but will it need to raise interest rates? This is not the first time a central bank has had to act to prop up its currency against traders but as a G7 member this is concerning.

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Brent oil held around $85 as markets continue to watch developments along the Israel/Lebanon border.

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Finally, you’ve got to love longevity. Bloomsbury Publishing recently confirmed that sales of J.K Rowlings Harry Potter series remains strong 26 years after first publication. As if to further prove the point, an original watercolour illustration has just become the most valuable Harry Potter item ever sold fetching $1.9m at auction in the US. Worth checking in the loft this weekend?

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Read Last Week’s Alpha Bites – Oils not well

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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.