UK Election Update and Perspectives on Party Control

Editors’ Note: MarketMinder Europe is politically agnostic. We favour no party nor any candidate and assess developments for their potential market impact only.

The hotly contested UK general election has taken a few twists and turns recently, which we think provides a reminder that early polls aren’t much use in predicting outcomes.

After some internal strife in the opposition Labour Party broke out last week, commentators we follow began suggesting the mooted landslide might not happen after all. Then, over the weekend, an unexpected (though familiar) candidate returned to the stage to run Reform UK, which onlookers we read suggest could strain the Tories anew. Such swings in sentiment elevate uncertainty near term—and they stir many headlines about what they mean for the election’s outcome. But either way, we don’t think it matters to stocks much. Our research shows no UK party has a monopoly on good or bad stock returns.

When Prime Minister Rishi Sunak kicked off the campaign in late May, it looked like Labour and Keir Starmer had pole position. Not only did they have a 20-point polling lead, but when Sunak announced the campaign during a rainstorm with no covering and no umbrella, the resulting memes (which rebranded getting soaked to getting Sunaked) seemed to illustrate the Conservatives’ fate.^[i]

The next few days also seemed to favour Labour. It has far fewer Members of Parliament (MPs) standing down at the election than the Conservatives, giving its candidates better name recognition.^[ii] Plus, Starmer chose to plug centrist candidates into most vacated constituencies, which we think was an effort to shore up his and the party’s reputation as moderate.^[iii]

But last Thursday, a dust-up with Deputy Labour Leader Angela Rayner—recently cleared of tax evasion allegations—seemingly changed the calculus. You likely know the details, but the important electoral point is she broke with tradition and disagreed publicly with Starmer’s decision to oust long-time MP Diane Abbott from the party following a scandal.^[iv] Several high-profile party members sided with Rayner, and on Friday, Starmer announced a U-turn.^[v]

This landed Labour infighting in headlines we follow for days, drowning out its policy proposals and giving the impression of a party in turmoil. We think Starmer has long sought to draw a contrast between Labour’s stability and the Conservatives’ bickering. That argument seems tenuous now, replaced by commentators we follow questioning his leadership.

Meanwhile, Sunak and the Tories were busy last week, pledging tax cuts for pensioners and vaguely alluding to broader relief.^[vi] Shrewd commentators we follow pointed out that the pension tax cuts simply undo some of the Tories’ earlier tax hikes, but overall, chatter we have seen surrounding them was warming. Then Nigel Farage returned to the campaign trail.

On Monday, he announced he will stand as a Reform UK candidate, reversing an earlier decision and giving the party a well-known standard-bearer.^[vii] The longtime Brexit leader will take over as head of Reform and, in a speech following the surprise announcement, Farage claimed Reform could equal the Conservatives’ vote tally “within a week.”^[viii] Perhaps that is an overoptimistic statement, but it does raise the chances that Reform is able to siphon more Tory support than most observers we follow thought days earlier. This would suggest Labour’s chances of a landslide rose.

So with just over four weeks to go, the outcome is anyone’s guess. Twists and turns point in opposing directions. Pollsters warn Labour’s edge is probably narrower than surveys imply, but a newly invigorated Reform UK may spell trouble for the Conservatives. The parties have yet to release their manifestos. Who will gain the policy momentum? Will the Tories or Labour better project stability from here? Will Starmer or Sunak be more at ease with voters? What of turnout?

We wrote last week that the campaign would probably heighten uncertainty. That seems to be manifesting now, with a hung Parliament a realistic possibility that didn’t get much ink a week ago. Fraught headlines we follow arguing one side or the other is better for the UK economy and market also abound. To us, it is perplexing. For the past couple years, we think both parties have sounded similar notes on economic policy, the divide smaller than many presume.

But also, market history shows stocks don’t play favourites. Exhibits 1 and 2 present two ways to see this. The first shows total and annualised returns under all UK governments since MSCI UK Index data begin in 1970. For simplicity, we count majority governments that spanned multiple prime ministers as a single government. But we did tease out minority and coalition governments, given the obvious impact on the policymaking.

Exhibit 1: Annualised Returns by UK Government

Source: FactSet, as of 31/5/2024. MSCI UK Index total returns in pounds, using monthly index levels due to data availability. If the transition happened in the month’s first half, calculations start from the end of the prior month.

Amusingly, in our view, the best and worst returns happened under a single Labour prime minister, Harold Wilson—he of the price controls and other policies we would consider net economic negatives. But his minority government overlapped with a wicked global bear market, whilst his majority administration captured the big global rebound.^[ix] Our first lesson: Global trends matter. A lot.

Our second lesson from this: Popular narratives don’t tell the whole story. Jim Callaghan’s minority government included the infamous Winter of Discontent, with tough times and widespread industrial action. But it also boasts the second-best annualised return of any government. Meanwhile, the lowest positive return happened under the business-friendly Labour government of Tony Blair and Gordon Brown—a stretch most remember as a time of boom and sunny optimism, in our experience.

Which brings us to lesson three: Market cycles matter. These long governments in particular include bull and bear markets, yielding a more nuanced reality than the cumulative returns imply.^[x] Exhibit 2 helps show this, presenting the same returns in a line graph. Suddenly, the Blair/Brown years look better, with the Tech bubble and Global Financial Crisis bear markets punctuating an otherwise nice bull run. We also see the bear market that marred Wilson’s early returns began under Conservative Ted Heath—and that bear markets happened under Thatcher and Johnson. The bull/bear tally is basically a draw.

Exhibit 2: UK Stocks Don’t Play Favourites

Source: FactSet, as of 31/5/2024. MSCI UK Index total return level, monthly, 31/5/1969 – 31/5/2024. The y-axis uses a logarithmic scale, which corresponds vertical movement to percentage change.

In our view, UK returns under the next government will probably have less to do with the party in power than broad global trends, which sector is in favour, economic drivers and the degree of gridlock within Parliament. We think the latter looks likely to be high no matter the electoral outcome—thank the infighting on both sides for that. And if there is a minority or coalition government, those increase gridlock by definition, given the difficulty in reaching a policy consensus and passing laws. Hence, political risk likely stays low, in our view, which should extend tailwinds, especially as uncertainty falls, allowing the UK to keep participating in this global bull market.^[xi]