General election could bring stability after ‘policy chaos’

10 June 2024

The results of the general election and a change for the country could bring stability after the “policy chaos” of recent years, says AXA Investment Managers.

With Labour’s polling over the last year sitting between 40% and 50% and the Tories polling between 20% and 30%, AXA IM said the assumption of a Labour government is likely to be “valid one.” While Labour’s economic policy is not clear, Starmer has ruled out increases to income tax and VAT and suggested that any spending on public services or investment would be properly costed and funded.

Chris Iggo, chair of the AXA IM Investment Institute, said: “There is clearly a desire to send a message that his Labour government will not comply with the typical stereotype of ‘tax and spend.’ Labour is not shy in bringing up the Conservatives’ fiscal record. The strategy is to put clear water between its promise of fiscal stability and the record of the Conservative government in recent years.”

But Iggo says that regardless of who wins, the general election is likely to put to bed the political and policy chaos of recent years and there is likely to be a “softer, more sentiment-driven” impact on how investors see the UK.

“A new government is no guarantee of stability, but Keir Starmer gives something of an aura of being boring which might not be a bad thing. Boring could be positive if it means policy stability and new policies being brought in that are not driven by populism. Companies will prefer such an environment,” Iggo explained.

For UK equities, there is the potential for some upgrade in investors’ minds should a more stable policy environment emerge, said Iggo. The mid-cap FTSE 250 equity index captures the bulk of UK domestically-focused companies. Historically, it has delivered better returns than the large-cap FTSE 100 with a 25 year annualised total return of 8.3% versus 4.8%. Since Brexit, the index has underperformed. In the last three years, to the end of May, the mid-cap index has had a total return of close to zero compared to 9.7% for the FTSE 100.

This underperformance means that valuations have improved. The mid-cap index currently has a 12 month forward price-to-earnings ratio of 11.7 times, slightly below its three-year average. On a positive note, analysts have pencilled in strong earnings growth with the 12-month forecast currently at nearly 20% compared to 5% for the FTSE 100.

Iggo added: “At the global level, UK equities punch below their weight. As of September 2023, the share of the UK in the FTSE All-World Index was just 4% compared to 61% for the US. A half-percent reallocation of global equity funds to the UK would be worth over 20% of the value of the FTSE All-Share Index.

“Such a move is probably pie in the sky, but there is an argument that things should align to generate a more positive view of the UK among global investors than has been the case since the country voted to leave the EU.”

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