Market Views: How should investors assess impact of the UK, France elections?
Two major European economies - the UK and France - underwent political changes following recent elections.
Both elections showed a shift to the left. While the UK election delivered an anticipated Labour Party victory, the magnitude of their win proved surprising.
In France, the election outcome was even more unexpected, with the left-wing Nouveau Front Populaire (New Popular Front) coalition prevailing over the centrist Ensemble alliance and more notably the right-wing National Rally party and its allies.
However, none of the three coalitions securing an absolute majority, leaving French politics more fragmented than before the vote.
We sought perspectives from asset managers on how Asian investors should evaluate the impact of the election results in the UK and France on markets and their assets.
The following responses have been edited for brevity and clarity.
Stephen Dover, chief market strategist
Franklin Templeton Institute
On UK election, for investors, the key impact is that the international perception of the UK is changing. The new government is visibly more moderate and international in tone, reducing the risk premium for UK assets.
We expect a closer relationship with Europe, less friction in trade with the EU and a focus on growth specifically via a boost to housebuilders, while in the short term, if the Bank of England moves to reduce interest rates at a slower pace, it will provide for Pound Sterling appreciation.
If the Bank of England surprises with speedier interest rate cuts, that would be a positive surprise for the equity market.
On French election, our sense is that markets will greet the outcome of the election as positive for European risk assets, bond spreads, and the euro.
The alternative outcome of a parliament hostile to the president would have delivered considerably greater medium-term uncertainty than what is now likely. With modest exceptions, the outcome over last weekend is likely to produce broad continuity in French domestic and foreign policy, as well as in France's approach to EU policies.
That said, whatever bounce markets enjoy is likely to be contained. France still faces considerable medium-term challenges including fiscal consolidation, long-term sustainability of key pillars of the social contract, like pensions and healthcare, and pressing needs to increase productivity.
It is highly unlikely that a majority constructed out of necessity – to keep the far right out of power – will have the political capital to address France's long-term challenges.
Raisah Rasid, global market strategist
JP Morgan Asset Management
For France, the policy agenda of the far-left Nouveau Front Populaire includes programs such as an increase in the minimum wage and the repeal of the pension reform legislation, which could potentially raise the French budget deficit.
In the near term, volatility could remain relatively high in European markets until further clarity from the incoming government’s fiscal proposal. In autumn, France and a few other EU member states will come into the scope of the European Commission’s excessive deficit procedure and thus will have to provide details on its plan to reign in public finances.
Until then, French bond spreads could remain elevated, which could dampen investor sentiment towards European markets in general. That being said, the improving economic backdrop and attractive valuations, together with EU institutional and ECB monetary backstops, will serve as tailwinds for European assets.
For UK, more broadly, we don’t anticipate any significant change in policy in the short term.
The Labour Party’s emphasis on fiscal prudence and economic stability could support household and business confidence, paving the way for a more sustained recovery in domestic activity. Greater confidence in the growth recovery could support UK equities which have been trading at a deep discount relative to their US peers.
However, the UK still faces structural growth challenges, including a lack of investment and a declining labour market participation rate. It remains to be seen if these issues will be resolved by the new government.
Howe Chung Wan, head of Asian fixed income
Principal Asset Management
Near term, the main takeaways from both elections would be relief from concerns over potential systemic risks helping to clear market uncertainty but at the same time not necessarily growth positive.
In Europe, the fiscal uncertainty emanating from a potential hung parliament in France will add to the ECB dovishness and affect the ability of France’s ability to lead in Europe given a weaker domestic position for the president. This could drag on the euro given already some expectations of a rebound in European growth and catch-up in the European economy relative to the US.
In the UK, the electorate went into the election vote looking for a stable government with minimal disruptions hence expectations were not high. Despite the Labour government winning by a wide margin, the new government however may not be able to implement significant fiscal plans to support the economy due to the ‘Liz Truss’ effect.
After the French and UK elections, investors will likely shift their focus on the growth and inflation trajectory in the US as well as the November presidential elections to take guidance on portfolio positioning globally.
David Chao, global market strategist, Asia Pacific ex-Japan
Invesco
French equities could regain momentum as the legislative election overhang has been removed, though government bond spreads could remain higher when compared to prior to the election because the political outlook remains murky until a new government can be formed.
If France’s new government can’t deliver reforms to boost growth, productivity and fiscal consolidation, or fails to demonstrate strong support for the EU, we should expect greater volatility in markets. For now, markets appear relieved at the lack of extreme outcome and are in ‘wait and see’ mode – we may need to wait until September to see what kind of government forms.
Contrast this with the UK, where we see a welcome return to political stability and centrism, which should reduce macro volatility and reduce the sovereign risk premium on UK assets. I expect a somewhat stronger sterling, slightly lower Gilt yields and a modestly lower risk premium on equities.
I don’t foresee the new government would make much difference, if any, to the Bank of England’s rate-cutting plans and we continue to expect roughly two interest rate cuts in the rest of 2024, with the BoE and the broader market largely focused on inflation dynamics. A potentially significant change would be if Labour implements some large-scale growth programmes, although their previously announced spending plans are fully funded and the party has pledged to maintain existing fiscal rules.
UK assets represent good value and have been for some time, in my view. On several metrics, UK equities trade on attractive multiples compared to similar companies in other developed markets as well as against their own historical data.
Ben Ritchie, head of developed market equities
abrdn
A landslide victory in the UK provides the sort of clarity and stability that equity markets need in an increasingly volatile world.
Labour’s pro-growth agenda is key to delivering the tax revenues needed to fund public services, with private capital playing a vital role in supporting investment. If the new government gets this right, businesses with significant exposure to the UK economy should be the likely winners - a shot in the arm in particular for companies in the FTSE 250 and FTSE Small Cap. With just a little more patience, investors could finally be rewarded.
A key priority for the new government should be to make UK equities more attractive for both domestic and international investors. One of the quickest and most effective ways to deliver this is to scrap stamp duty on UK shares, making Britain more competitive, rewarding savers and attracting vitally needed inward investment.
In France, we believe that a worst-case scenario has been avoided, which would have been a parliamentary majority for either the right or left-wing blocks with their desire for budget expansion. It now looks likely that we will end up with either a technocratic government or some kind of centrist coalition both of which should be supportive for French assets.
Our European equity portfolios are overweight France – we see it as a good source of quality companies with attractive long-term prospects rather than having a strong top-down view. But we are underweight French revenues – given we own the more international players.
As a result, we would be very happy on the basis of French political risk to add more to positions but being aware that they will be volatile but ultimately well-positioned long-term and attractively priced.
Elliot Hentov, head of macro policy research
State Street Global Advisors
On UK, the key point is that the new government lacks fiscal space, so it must make up with policy reform.
For investors, the most consequential would be structural reforms that address supply-side constraints on growth. The big ones are planning reform to enable a substantial increase in homebuilding, and to a lesser extent, in infrastructure.
Small and mid-cap UK stocks are already responding to an expected improvement in those areas. In addition, we believe that the UK will improve its trading relationship with the EU, first in the areas of defence and aerospace, but then also in other goods and services. Together, this is all mildly GBP-positive, accentuated by political stability versus Europe.
On France, the result matched our expectations, namely a hung parliament. What matters now is whether this can de-risk the fiscal outlook for investors and shrink risk premia.
We do not expect OAT-Bund spreads to tighten any further. French equities will also continue to exhibit a discount to the rest of Europe as residual uncertainty remains over government formation, budgeting and other policies.
We believe France will muddle through, keeping deficits largely stable (but not improving), and leveraging EU funds as much as possible. This would allow markets to remain calm for the coming year.
However, there remains a downside risk of parliament being unable to pass minimum legislation and triggering a renewed political crisis, as such we consider remaining underweight French bonds and equities.