UK General election 2024

Last week, UK Prime Minister Rishi Sunak unexpectedly called a general election on July 4th, 2024. The announcement may have come as a surprise to most, but a general election was to be held, at the latest, on January 28, 2025.

The polling numbers published by Politico last week show that the Labour party has a 22% lead on the Conservatives. Such a lead has been consistent for almost a year, suggesting that it is the Labour party’s election to win. 

As the party leaders hit the campaign trail, the base case scenario is for a majority Labour government. The results of the recent local and mayor elections support this outcome. 

UK National parliament voting intentions

A glimmer of hope for Rishi Sunak and the conservatives: a study by Capital Economics suggests the odds of re-election for the incumbent improve when the GfK consumer confidence index is above -15. This index has improved consistently in 2024 and is currently at -17, after touching its lowest ever reading in late 2022. That said, it may be too little too late for the current government.

The UK economy fell into a recession late last year. While growth remains subdued, economic data is showing signs of improvement in 2024. Household purchasing power is improving as wage growth accelerates while inflation has decelerated from a peak of 11% in late 2022 to 2.3% in April. It is possible the Prime Minister saw the improving economic backdrop as a window of opportunity.

Political parties should publish their platforms shortly, providing more visibility for the financial community. A key policy difference between Labour and Conservatives will center around how to reduce fiscal deficits: higher taxes vs lower spendings. 

The Labour party seems inclined to use higher taxes to boost public spending. The party has presented a “Green Prosperity Plan” and stated its desire to boost the number of new homes built, laying the groundwork for increased public investment. 

To appease financial markets, leaders of the Labour party have indicated they would maintain the fiscal rule that requires the net debt (as a % of GDP) should be declining by year 5 of the fiscal forecast. This would limit fiscal imbalances as higher spending needs to be associated with increased revenues. 

Market participants will be nervous to hear in greater details the fiscal plan of the Labour party as memories of the Liz Truss government plan in 2022 and the subsequent market volatility linger.

With an upcoming general election, the Bank of England will most likely postpone any rate cuts until after the election. The central bank is scheduled to meet on June 20th and August 1st. Less than 3 days before the general election being called, financial markets were still pricing a 50% probability of a rate cut at the June 20th meeting. Following a stronger-than-expected inflation report and the announcement of a July 4th election, the probability of a rate cut next month has fallen to near 0% with a full 0.25% rate cut expected by November rather than August. 

Volatility could weigh on investor sentiment but for those with a long investment horizon, UK equities offer a very low valuation entry point, and investors own very little UK stocks within their portfolios. The MSCI UK index aggregate valuation stands at the 46th percentile of its historical distribution while State Street Global Markets data shows that equity holdings have been increasing recently but remain well below the historical average. 

We remain confident the UK equities can continue to deliver strong relative returns over our investment horizon although a general election could create a more volatile environment for the foreseeable future.