UK General Election
The UK will hold an early general election on July 4. The election is less suspenseful, with professional bodies predicting a 100% chance that Labour will become the next party in power. Labour leader Starmer is likely to succeed him as prime minister.
Under Starmer's leadership, Labour's position has gradually shifted from the left to the center in recent years. Labour's overall fiscal stance is similar to that of the Conservatives, but it is likely to be more inclined to raise taxes and avoid spending cuts, with a greater emphasis on promoting private investment than the Conservatives. The party belongs to the "pro-European" faction, and the UK-EU partnership is likely to become even closer in the future. In addition, it opposes Scottish independence and the reunification of Ireland, supports NATO, and is stricter on immigration and the transition to traditional energy sources.
The market is less sensitive to this "small suspense" election event, and the negative impact of political uncertainty on the pound exchange rate is minimal. On the contrary, the arrival of the Labour Party is welcomed by the market and may become an opportunity for capital to flow back to the UK, which is positive for the pound. In the past, the British pound and the UK stock market also tended to strengthen during general elections, where the outcome was relatively certain. On the interest rate front, as the successor will not have much room to maneuver on fiscal policy, his fiscal plan is unlikely to significantly change market interest rate expectations or credit premiums, and the disruption to gilt yields will be limited.
From the Brexit referendum to Johnson's "partygate" to Truss's "mini-finance", the political situation in the UK has been frequently turbulent in recent years, and political events have gradually become an important disturbance to the pound exchange rate. The political situation has stabilized since Sunak became prime minister, but another general election is on the horizon, which could inject new volatility into financial markets. In this article, we will discuss the UK general election and its possible impact on the market. 1. Is the Labour Party determined to win? On May 22, the current British Prime Minister Rishi Sunak announced that he would hold an early general election on July 4. The decision comes against the backdrop of the IMF's upward revision of its forecast for UK economic growth on May 21. At the same time, the April CPI released in May fell less than expected, and the risk of the Bank of England delaying the rate cut increased. In the fierce competition of the British general election, the Conservative Party and the Labour Party often stage a "dragon and tiger battle" drama. In every general election since 1922, the winner has not been the Conservatives, i.e. Labour. This election is no exception. As of May 3, 2024, Labour and the Conservatives are in the top two polls in terms of support, but the Conservatives (24%) are significantly behind Labour (42%). Electoral Calculus provides a prediction model of the outcome of the UK general election based on factors such as opinion polls, historical votes, demographics, etc., which shows that the Labour Party has a 100% chance of becoming the largest party in Parliament, with a 98% chance of winning a majority and a 2% chance of forming a minority government[1].
2. The "boring but righteous" Starmer The current leader of the Labour Party is Sir Keir Starmer. If Labour wins the election, Starmer is likely to become the next prime minister. Starmer's parents were staunch supporters of the Labour Party, giving him the same name as the Party's first leader, Keir Hardie. Starmer inherited his parents' wishes and joined the Labour Party as an undergraduate at the University of Leeds. After graduating, he went on to study for a Postgraduate Diploma at St Edmund's Academy, Oxford, where he obtained a Bachelor of Civil Law. Prior to becoming a member of Parliament, he served as a lawyer and then as Attorney General, participated in anti-Iraq war demonstrations and wrote relevant legal opinions, opposed the repeal of the Human Rights Act by the Conservative Party, and prosecuted MPs suspected of falsifying public funds. In 2015, he joined the House of Commons as a Labour MP for the constituencies of Holborn and St Pancras. After Jeremy Corbyn's victory in the 2016 Labour leadership election, Starmer was promoted to Brexit Shadow Secretary[2], during which time he advocated leaving the EU and reducing immigration. Following Labour's defeat in the 2019 general election, Corbyn resigned as leader of the Labour Party. [3] Stamo took over as the new leader of the opposition on 4 April 2020. In recent years, Starmer's personal stance has gradually shifted from socialism to centrism. Starmer advocated a move away from the "ultra-leftism" associated with Corbyn. He abandoned much of Corbyn's agenda on immigration, social justice and, above all, foreign affairs, and appointed a large number of centrist figures within the Labour Party, which somewhat united the different factions within the Labour Party[4]. On the economic policy front, he supported greater investment in public services, such as the National Health Service (NHS), and called for an increase in taxes. On political issues, he opposed the independence of Scotland and the unification of Ireland; I do not agree with Corbyn's criticism of NATO, and believes that we should stand firmly on the side of NATO, such as supporting Ukraine, sanctioning Russia, and opposing the British armistice alliance. Starmer's supporters believe he has succeeded in helping the Labour Party regain public trust, and that his policy platform is designed to be in line with the concerns and expectations of British voters. However, from the perspective of naysayers, Starmer is more of an unexpected beneficiary of the prolonged turmoil that the UK has experienced since Brexit. And Starmer's demeanor often led his political opponents to portray him as dull. Boris Johnson once dedicated him as "Captain Crasheroonie Snoozefest". According to an October 2023 survey by Savanta ComRes, "boring" is the most common word used by voters to describe Starmer, but the virtues of "honest" and "good" are also frequently mentioned[5]. 3. Limited Fiscal Flexibility Comparing the economic policies of the Labour Party and the Conservative Party in this election: In terms of fiscal policy, first of all, although the Labour Party's position is still on the left, the overall proposition will be similar to that of the Conservative Party due to the limited fiscal space. Labour will face the same general fiscal constraint that government debt must fall as a share of GDP and the deficit must not exceed 3% of GDP in the fifth year of the official forecast period. At the same time, the Labor Party will try to avoid repeating the mistake of Truss's "mini-finance". In the current environment of high government debt pressure, low GDP growth and high interest rates, the financial market will be more sensitive to the phenomenon of government overdraft. At present, the UK 10-year government bond yield is at the same level as the year-on-year growth rate of nominal GDP, and if it catches up sharply, the debt-to-GDP ratio will tend to rise. In addition, an aging population is increasing pressure on health care and pension spending, while geopolitical risks are putting pressure on defense spending, which is a problem that anyone who takes office will face. Second, Labour may be more inclined to raise taxes and avoid spending cuts, and is in a better position than the Conservatives to promote private investment. Although during the election campaign, both parties expressed reluctance to raise taxes on a larger scale. However, since the NHS, defence, overseas aid and education are key areas of government support, in the context of deleveraging, which means that spending in other sectors will be cut sharply, and tax increases are a more appropriate option than ignoring fiscal rules. Labour has proposed that it will increase VAT on private school fees, tax overseas income of non-resident UK residents, and raise stamp duty on immovable property from 2% to 3% for non-residents after taking office, while the Conservative Party has promised some tax cuts without elaborating on the tax increase. In terms of spending, according to the current government's plan, public investment as a percentage of GDP will fall to 1.8% by fiscal 2028 from 2.6% in fiscal 2023. In this election campaign, the Labour Party promised to "provide high-quality social care for all who need it", as well as cutting green spending to make room for other spending. Labour Party leader Rachel Reeves said at Davos in January that the party planned to restore Britain's reputation for business by putting private sector investment at the heart of its growth strategy.
In terms of other economic policies, on immigration, Labour favours a return to 200,000 net migration, while the Conservatives believe a reduction of 300,000 is appropriate. As of the fourth quarter of 2023, net migration in the UK was 685,000. Clearly, Labour's aims are much stricter. On employment, Labour plans to provide more security for those in the work, while promoting more flexible work arrangements. In response, the Conservatives took a stand, arguing that it would disrupt the job market, increase unemployment and strikes. On climate, Labour's policies are significantly more environmentally friendly than those of the Conservatives, although fiscal constraints have forced Labour to rein in its green investment ambitions in the short term. When it comes to international relations, Labour is on a "pro-European" wing relative to the Conservatives, and if Labour comes to power, the UK-EU partnership could become even closer. However, the Brexit-provoking Starmer has taken a relatively cautious stance for now, promising not to "repent" and ruling out rejoining the single market or customs union. Labour is likely to focus more on how to "make Brexit work"[6]. Moreover, if Trump comes to power, both Labour and Conservative positions are likely to tilt in favor of the EU.
Fourth, the impact of the market Due to the "faulty" lead of the Labor Party in the polls, the suspense of the election result is small, the market is less sensitive to the event, and the negative impact of political uncertainty on the pound exchange rate is minimal. On the contrary, the coming of the Labour Party could be an opportunity for capital to flow back to the UK, which is good for the pound. According to a September 2023 Bloomberg poll of more than 500 financial professionals[7], about two-thirds of professional investors believe that a Labour victory would be the "most market-friendly outcome" in the election. Of course, it is still necessary to be wary of an unexpected convergence in support between the two parties, and even the failure of the Labour Party to capture a majority of seats, resulting in a suspended parliament, which increases political uncertainty and weighs on the pound. On the interest rate front, as the successor will not have much room to maneuver on fiscal policy, his fiscal plan is unlikely to significantly change market interest rate expectations or credit premiums, and the disruption to gilt yields is likely to be limited. Looking back at the previous British general elections with less suspense in history - June 9, 1983, May 1, 1997, and June 8, 2017, we can find some of the operating rules of the stock and bond markets. On the eve of the 1983 general election, the Conservative Party maintained its lead in the polls, and the final election results were close to the polls. In 1997, Labour's polls were dominated by the Conservatives, and despite a slight decline in popularity as the general election approached, Labour still won the election by a large margin. In 2017, the Conservatives won more in the polls, but Labour's manifesto a month before the general election attracted the attention of grassroots and young people with a grassroots campaign strategy, significantly narrowing the disadvantage over the Conservatives, but the final vote gap was still 7%. In the three months before and after such an election, the FTSE All-Share index rose; The pound was dominated by strong volatility against the US dollar, rising in the three months before the election; UK 10-year yields are generally volatile and will fall in the period after the election, with the term premium component (broken down by ACM) tending to fall (except in 2017). First of all, there is a strong correlation between the above asset price patterns and the timing of the British general election. The UK government's preference for central bank rate cuts (or the end of the rate cuts) and the faster pace of growth than the US for the general election is closely related to the strong performance of these stocks. Second, political events with low uncertainty have less negative impact on the pound exchange rate and the UK stock market, and may even have a boosting effect. During the election, the monetary policies of the Federal Reserve and the Bank of England diverged (tightened in the United States and loosened in the United Kingdom), and the pound still recorded a rally against the US dollar on the one hand, which is related to the fundamental advantage on the one hand, and on the other hand, it may be good for the election. In addition, the results of the UK general election are out, and the term premium component of long-end yields is likely to decline, as the election has eliminated uncertainty about the future to some extent. It should be noted that there was no switch of ruling parties in the above three general elections, and the current opposition Labour Party is more likely to come to power than the previous ruling Conservative Party. In addition, the UK is still in the midst of economic recovery, with real GDP growth significantly lagging behind that of the US, and facing a high interest rate environment. In the past, the law of asset price movements cannot be fully borrowed.
Note: [1] A minority government is a political party that attempts to form a government on its own, but does not have enough seats to form an absolute majority, thus relying on the support of other parties to pass key legislation and budgets, and other parties do not join the coalition government. For example, after the 2017 general election, the Conservative Party reached a "trust and support agreement" with the Democratic Unionist Party (DUP) in Northern Ireland to maintain a minority government. [2] The Shadow Minister is a member of the Shadow Cabinet. Shadow cabinets refer to democracies with a parliamentary system, in which the opposition parties set up a reserve cabinet to prepare for coming to power, and have shadow ministers corresponding to the ministries of the cabinet authority. When it comes to parliamentary debates, shadow ministers tend to speak out enthusiastically, pointing out and attacking the problems and shortcomings of the Cabinet while articulating their own party's views. （https://zh.wikipedia.org/wiki/%E5%BD%B1%E5%AD%90%E5%86%85%E9%98%81） [3]https://zh.wikipedia.org/wiki/%E5%87%B1%E7%88%BE%C2%B7%E6%96%AF%E5%A1%94%E6%91%A9#%E5%A4%96%E4%BA%A4%E4%BA%8B%E5%8A%A1[4]https://m.yicai.com/news/101993731.html[5] https://www.telegraph.co.uk/news/2023/10/10/keir-starmer-boring-voters-poll-public-opinion-labour/[6] https://www.economist.com/britain/2024/02/01/how-does-the-eu-view-the-labour-party[7] https://www.bloomberg.com/news/articles/2023-09-17/bloomberg-poll-labour-led-government-will-be-best-for-uk-markets-investors-say
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