Charlie Lloyd, Head of Investments at Shackleton Advisers comments on recent political uncertainty and what it means for UK gilts.
Uncertainty over Keir Starmer’s future is unhelpful for UK bond markets, particularly since inflation is on track to fall quite sharply in the coming months and the Bank of England appears to be gearing up to cut interest rates as soon as March, with one or two further cuts later in the year.
Bond market fears at this juncture are somewhat understandable, given that some of the potential replacements for the Prime Minister, most notably Angela Raynor, sit politically to the left of Keir Starmer.
However, with the cabinet rallying behind the Prime Minister, at least in the short term, it would appear that the worst fears of bond markets may be avoided until after the local elections in May, assuming Starmer can survive until then.
The most obvious replacements, Wes Streeting and Angela Raynor, also face issues of their own. In the case of Streeting, his close association with Peter Mandelson, whilst Raynor awaits the results of an HMRC investigation. Taking over the Labour party before the local elections is also an unattractive proposition given current polling.
The local elections are likely to be a referendum on Keir Starmer and the Labour government, and a poor result could result in another attempt to oust Starmer. A leadership contest would almost certainly lead to short-term volatility in UK bond markets and an increase in the cost of borrowing through higher yields.
A prolonged contest could impact the economy if gilt yields traded at a premium to other bond markets for an extended period, not to mention the potential impact on consumer confidence.
Backbench MPs have little appetite for fiscal reform, given a series of u-turns on recent tax and spending announcements, including efforts to reduce the welfare bill. A leadership contest therefore increases the likelihood of further fiscal profligacy, which may complicate the Bank of England’s task.
However, we’d also expect that any potential replacement for Keir Starmer would be aware that bond markets represent a threat to political stability and economic credibility, therefore requiring a market-friendly Chancellor. In some respects, the appointment of Chancellor is as important as the next Prime Minister, as least from an investor perspective.
Wes Streeting is perceived as the most bond market-friendly of the potential challengers and would be seen as a continuity candidate, as would Shabana Mahmood, whereas Andy Burnham could cause significant concern and bond market angst, given his perceived position as sitting decidedly on the left wing of the Labour party.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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