The election results are historic on many counts. Labour has won 412 seats, up from 206 prior to the election. The other big, but widely anticipated, story is that of the Conservative party’s crushing defeat down to only 121 seats from 345 prior to the election.
While there are many geopolitical ramifications from this news, here are some key investment and pensions’ related impacts:
- The key markets to watch for immediate reaction to the news were those of currency and interest rates:
- Currency – sterling vs. both US dollar and Euro has remained fairly unchanged overnight and since, with the results having been widely expected. Contrast this with how these markets moved significantly back in 2016 on the back of the unexpected Brexit referendum results. To the extent that sterling has been impacted it has been positively, suggesting that the expected results are viewed somewhat favourably.
- UK gilt markets too opened largely unchanged. But notably the direction, while marginal has been yields slightly down, again suggesting that markets are not spooked by the results.
- A key question that remains to be answered is whether this huge Labour majority will embolden Keir Starmer to govern from the largely centrist position that he campaigned under or will it strengthen the more left-wing parts of his party to demand a more significant change in approach. The answer to this question may have significant impacts on markets over the coming year or so. Watch out for the budget, presumed to be in September for some clear signals
- Once again, the two key markets for UK investors to focus on from this perspective will be UK bonds, both government and corporate as well as currency:
- Bonds – while a repeat of the 2022 gilt crisis debacle may not be a likely outcome, significant changes in the cost of borrowing resulting from fiscal policy changes may well be on the cards in the year or two ahead. Investors that hold significant levels of UK government or corporate debt (pension funds we’re talking to you) should ensure that they have considered the ramifications of moves in yields in either direction. Of course, this has been something that has had more attention paid to it since 2022, so there is some hope that positions are more robust. Other investors should likewise stress test their portfolios for significant yield curve changes.
- Currency – with many investors having a significant portion of their portfolios invested overseas, currency risk is another area that should be given adequate attention. Some foreign currency exposure can be seen as a diversification from domestic risk, however having a clear understanding of your domestic vs. foreign currency exposure and a considered position on how much FX risk to carry is advisable
- With regards to equity markets, the fact that most investors have moved to far more globally diversified portfolios means that impacts on equity markets are likely to have less effect on client portfolios. Watch out for the US election results in November for possibly a more significant impact – that race is also a lot closer and therefore more likely to deliver a surprise either way. For what it’s worth, the FTSE opened up by 0.2% on the morning after the election and is slightly up since; again, stable but somewhat positive.
Bear in mind that we still have many elections to come across the globe this year; the aforementioned US election in November, France’s currently underway to mention just two.
We would encourage schemes with significant equity holdings to consider their time horizons and objectives. In some cases, adopting a structured approach to equity holdings can make a lot of sense.
On the pensions front, Labour’s comments so far don’t differ significantly to what was the previous Tory governments agenda to a significant degree. However, coming at things from a different philosophical perspective may lead to some changes:
- We may see a continuation of the Tory government’s drive towards a public consolidation vehicle for DB pension Schemes. Labour is less likely to be dissuaded by the promise from existing insurers that the market is functioning well enough to provide an answer to this market demand.
- We may see some changes to the pensions regime that favour workers at the cost of large savers, potential areas for targeting include employer contribution rates , annual contribution caps and lifetime allowance changes. We will have to wait and see.
-ENDS-
