With opinion polls suggesting that the general election on 4 July is likely to lead to a change of government after 14 years of Tory rule, many traders and investors are wondering what impact this will have on UK markets such as GBP/USD and the FTSE 100. We asked our regular contributors to share their thoughts.
Pound pricing in a Labour win
Writing in last Friday’s Week Ahead, the trading expert and founder of Mott Capital Management Michael Kramer argued that the election’s impact on currency markets is likely to be muted. This is because the prospect of a Labour victory – the election’s most likely outcome, according to the BBC’s online poll tracker – has already been priced into the pound.
The pound has lost ground against the US dollar in the past month, falling from around $1.281 at the start of June to current levels near support at $1.265. “The election result could push the currency down towards $1.25,” Kramer comments. “Even if GBP/USD rallies following the result, a move higher could run into significant resistance at $1.27 and $1.28. At this point, the path of least resistance may be towards lower levels.”
More so than the election, the possibility of a Bank of England interest rate cut in August or September is likely to drive price movements for GBP/USD.
FTSE 100 could rally
The FTSE 100 may get a minor bump from the election, but the UK’s leading share index is more likely to benefit from an improving economic outlook, says our market analyst Konstantin Oldenburger. Inflation has eased back to the Bank of England’s 2% target, falling from a peak of 11.1% in October 2022, while the UK economy grew 0.7% in Q1 as the country emerged from a shallow recession.
These factors, and investor bets on an interest rate cut later this year, have helped the FTSE 100 perform well in 2024. And the index could be poised to make further gains, according to Oldenburger. Up more than 5% so far this year, the FTSE 100 has “broken above the psychologically important 8,000-point mark,” he says (article in German). The prospect of a period of political stability “could facilitate a further rise to the 10,000-point range” over the medium to long term, he adds.
Sectors and stocks to watch
The FTSE 100’s year-to-date gains seem to suggest that the market backs Labour’s pledge to keep a tight lid on public spending, manage the national debt, build more homes and put the country back on a path towards stable economic growth.
In particular, Labour’s plans to increase the supply of housing – the party’s manifesto includes a commitment to building 1.5m new homes over the next five years – could be good news for FTSE 100-listed housing stocks like Barratt Developments, Berkeley Group, Persimmon, Taylor Wimpey and Vistry.
In contrast, Labour’s plans to renationalise train operators and water suppliers could be bad news for stocks such as Trainline, First Group, Severn Trent and Pennon Group.
A long road ahead
It’s important to remember that the election is not a foregone conclusion, and that any major surprises could trigger some market volatility. But assuming that the polls are correct and Labour forms the next UK government, what challenges will the party face? The short answer is: several. The National Health Service and other key public services are in crisis. Economic growth is weak. Taxes and public debt levels are high. These issues will take years to fix. Ultimately, the success or failure of Labour’s proposed solutions will determine the direction of the FTSE 100 and the pound to a far greater extent than one day of voting.
While elections generate lots of headlines, it tends to be the unscheduled, unforeseen events that have the biggest impact on markets. A recent article by Lukas Brandl-Cheng and David Hsu of Vanguard suggests that “markets tend to disregard UK general elections”. Based on their analysis of UK and global stock markets from January 1995 to December 2023, a period that covers seven UK general elections, the elections had only “a minimal impact on stock market performance”. Of far greater significance for stock markets were “events of a much bigger, global scale”, such as the bursting of the dot-com bubble in the early 2000s, the global financial crisis in 2007-09 and the Covid-19 pandemic in 2020.
The UK’s next government will be hoping that the difficult road ahead is paved with as few of these global shocks as possible.
Disclaimer: CMC Markets Singapore may provide or make available research analysis or reports prepared or issued by entities within the CMC Markets group of companies, located and regulated under the laws in a foreign jurisdictions, in accordance with regulation 32C of the Financial Advisers Regulations. Where such information is issued or promulgated to a person who is not an accredited investor, expert investor or institutional investor, CMC Markets Singapore accepts legal responsibility for the contents of the analysis or report, to the extent required by law. Recipients of such information who are resident in Singapore may contact CMC Markets Singapore on 1800 559 6000 for any matters arising from or in connection with the information.
