Macroeconomics

The Labour Party led by Sir Keir Starmer has achieved a landslide victory in the UK’s national election, a result which is likely to support the country’s improving economic situation. Labour is expected to pursue a more collaborative and constructive relationship with the EU, for example - an approach that should lead to smoother trade negotiations, reduced tariffs, and more predictable regulatory frameworks. 

By addressing Brexit-related disruptions, Labour's policies aim to foster a more integrated and efficient market environment. UK businesses operating within and trading with the EU stand to benefit. Likewise, a stronger relationship with the EU should help repair the UK’s business investment trends - by some measures the worst in the G7. 

The Russia-Ukraine war has seen the UK take on a more critical role in European security. The country’s current defence spending of around 2 per cent of GDP puts it heads and shoulders above France and Germany. Labour hopes to raise the number to 2.5 per cent of GDP “as soon as resources allow”.

But despite expectations of some increased government spending, the party has signalled a commitment to fiscal responsibility and a cautious approach to tax increases, at least in the short term. Growth will be crucial to avoid crippling spending cuts or tax rises but we think meaningful tax increases are unlikely within the next 12 months.

- Salman Ahmed, Global Head of Macro and Strategic Asset Allocation

Multi-asset 

As the dust settles on the election, we believe the UK can look forward to a period of greater political stability that could attract foreign capital back to the country. The economy is recovering from a slowdown in 2023 and the outlook is improving. First quarter growth was driven by an uptick in consumer spending, while real disposable incomes also increased for the second quarter in a row. Consumers are saving more which could support further growth next year as confidence builds and savings are converted into spending. 

The inflation picture is also looking more positive. Services inflation is still higher than the Bank of England (BoE) would like, but we believe it will begin its rate cutting cycle before long, which should further stimulate economic activity.  

A level of optimism has also returned to the M&A sector. Corporates are looking to take advantage of this, and deals are happening at attractive premiums. If we look at price-to-earnings, price-to-book, or dividend yield, the UK offers excellent value. This is partly to do with the sector makeup of the UK market being more skewed towards value sectors such as energy and materials and away from more growth orientated sectors like technology. However, there is no doubt that the UK offers equity exposure at an attractive price, with opportunities across the market cap spectrum.  

- Chris Forgan, Portfolio Manager

We hold a fairly constructive stance on risk assets and equities in particular, although we have trimmed some risk in the last couple of weeks on the back of short-term volatility around political risk, especially in Europe. We remain cautious on interest rate risk and selective on credit assets with a preference for hybrid bonds and some emerging market debt opportunities with attractive carry.

We have some exposure to the UK but await an improvement in fundamentals to potentially add to our exposure there. UK equity valuations are pretty attractive, however we really need to see rates coming down for growth to materially improve and benefit domestically-driven UK mid-cap equities. 

- Talib Sheikh, Portfolio Manager

Fixed income

It is always important to note how global the sterling corporate bond market is. Over half of the sterling investment grade credit market is non-UK-domiciled. Interestingly, this makes the sterling corporate bond market less concentrated (by country) than the global corporate bond market, which is 57 per cent US-domiciled. Sterling credit spreads tend to be driven by global factors more so than UK-domestic factors. So the impact of this election is likely to be muted for sterling credit spreads. UK macro factors are a more important consideration for interest rate decisions over credit decisions. Coming into this election we were defensively positioned from a credit perspective, largely for valuation reasons rather than risks around the election result. 

Corporate bond spreads remain at the tighter end of the historical range. There are pockets of value within investment grade credit, notably in the securitised part of the market, at the short end of the curve (via 1-5 year credit), and in the politically sensitive water sector. For the latter, volatility is likely to remain, with a decision from the sector’s regulator Ofwat on consumer price rises due in July and final determination later in 2024. We think that government action to haircut water company debt would lead to a significant repricing in the broader water sector and other regulated utilities. Making the debt financing for core UK infrastructure unattractive for bond holders is not an ideal outcome for any government.

- Kris Atkinson, Portfolio Manager

Irrespective of a Conservative or Labour victory, both had refrained from expansive fiscal promises, meaning there had been little to upset gilt markets. One could argue there’s been more to be concerned with elsewhere in Europe, notably France. 

We therefore expect this outcome to have a limited long-term impact on gilts. For us, the key is always the likely impact on the future path of policy rates. With the election out of the way, attention will quickly turn to the data, and with inflation continuing to moderate we expect the BoE to ease later this year. We continue to play for lower yields and steeper curves.

- Ian Fishwick, Portfolio Manager

Equities

We think the formation of a Labour-majority government will have a positive impact on housebuilders and construction materials. We expect Labour to reinstate housebuilding targets and perhaps also fund investment in local planning departments, which are under-resourced and inefficient and contribute to delays in the system. That should alleviate builders’ concerns about planning bottlenecks impeding growth in the medium term. We have been confident for some time about the attractive long-term prospects for companies exposed to the housing sector because build rates need to rise to address Britain’s growing housing deficit.

Both the Labour and Conservative parties now also seem to be more supportive towards banks, viewing them more as a source of much needed investment and lending to the economy, rather than a pariah industry to be regulated and taxed. We will be listening closely to any change in mood music once the new government is in place.

We suspect the new government could take a firmer line with water utilities given the well-publicised issues seen over recent years. It could put pressure on regulators to move repeat offenders under special measures, which can include restrictions of dividend payments and executive remuneration. However, the government will want to weigh the impact of such measures on investor sentiment against the need for investment in nuclear and renewable energy. The grid also remains an important source of much needed capital in order to connect new sources of power ready for the mass adoption of electric vehicles.

- Aruna Karunathilake, Portfolio Manager

The UK election is one of the many inputs to our investment process. One area of interest is Labour’s commitment to speeding up the UK’s transition to renewable energy. Infrastructure will be an essential part of that build out. On the flip side, the party has doubled down on its commitment to remove the North Sea investment allowance, which clearly hurts that part of the oil and gas sector. 

However, while there continues to be a degree of uncertainty both in the UK and globally, the general UK economic outlook has improved. Companies have proved surprisingly resilient and we are encouraged by the performance of our holdings in the recent reporting season. UK equities continue to trade at a wide discount compared to other markets, representing an attractive opportunity. 

- Alex Wright, Portfolio Manager