A stronger pound and ‘bond vigilantes’: What should markets expect ahead of an election
With elections in both the US and UK this year, 2024 could turn out to be a volatile year for markets.
Historically, London markets put in a strong showing around elections.
According to AJ Bell analysis, the FTSE All-Share has seen double-digit percentage gain in the first year after an election when there is a change in Prime Minister.
Even when the governing party remains the same, markets record greater than average gains.
This time around is likely to be no different, at least as far as the UK is concerned, given the relative sanity of the Conservative and Labour party.
Polling consistently puts Labour around 20 points ahead, suggesting a change in government looks likely. But this prospect does not frighten markets to anywhere near the same extent as in 2019.
Russ Mould, investment director at AJ Bell, noted that the current Labour leadership is “unlikely to spark the sort of fear that would have been inspired by an administration whose driving forces were Jeremy Corbyn and John McDonnell”.
However, speaking to Bloomberg, Vivek Paul, chief investment strategist at Blackrock, warned that election season might encourage both parties to “promise looser fiscal policy”.
“In the lead-up to this year’s UK election, we’re watching the fiscal policy stance,” he said.
The Conservatives are widely expected to announce another round of pre-election sweeteners in the Spring Budget, with cuts to inheritance tax and income tax both mooted.
Labour meanwhile are planning to lift investment in green projects to up to £28bn per year by the end of the next parliament, funded by borrowing.
Although the opposition have stressed this will only take place if the fiscal situation allows, the Conservatives have argued the policy is fiscally reckless.
Paul warned that rash spending plans could throw the bond market into turmoil. “The more this occurs, the greater the likelihood of the return of the bond vigilantes,” Paul said.
Analysts at Goldman Sachs agreed that the government would seek to “loosen the strings” ahead of an election.
“That could help support Sterling on the margin and argue for somewhat tighter monetary policy, all else equal,” they said.
Looking longer term, they pointed out that both parties were more favourable to forging closer ties to the EU than had been the case in the last few election cycles.
“This should help support the Pound on the margin, or at least prevent another structural shift in its external balances,” they said.