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Astute Market Overview - 11th June 2024

Hello and welcome to the latest Astute Market Overview.

In our Q4 2023 quarterly commentary, we highlighted the huge number of global elections in 2024 as one of the key topics to watch this year. As we approach the middle of the year, these elections are well under way, and it seems like a good time to revisit this topic.

 

Since our last update, a UK general election has been called. Whilst we all anticipated its arrival this year, the timing was uncertain! On the same day as the announcement, April’s inflation report was released, revealing a 2.3% increase in prices when compared to April 2023. This figure exceeds both the Bank of England’s forecasts and market expectations but is a significant decrease from March’s 3.2% price growth. Furthermore, the 2.3% inflation rate is close enough to the 2% inflation target to trigger the UK general election, allowing the current government to highlight their success in reducing inflation during their tenure.

 

As we spend the next few weeks reading manifestos and watching debates, we will be trying to weigh up the risks in order to ascertain how different outcomes might impact our lives. From the markets’ perspective however, the differences between the main parties is minimal, suggesting limited risk. Regardless of which party wins, radical, business threatening changes are unlikely.  Think back to the 2019 general election, where the Labour Party lost many seats under Jeremy Corbyn, standing for what was coined the most radical manifesto in decades. Or the more recent fallout from Liz Truss and Kwasi Kwarteng’s growth plan under the Conservatives, which caused significant disruption in both the bond market and government front bench.

 

Even if the next prime minister were inclined to roll out radical reforms, they would be constrained by the limited amount of fiscal headroom available, reducing the likelihood of actions that could adversely impact markets.

 

The real potential risk lies is in the unlikely scenario of a hung parliament, where a lack of decisive government action would lead to market uncertainty. Currently, it looks like a Labour majority will win the day, but, of course, that can all change.

 

Markets often believe that central banks pay attention to politics – and therefore that the Bank of England (BoE) is unlikely to cut rates in June as it may seem politically motivated. However, the central bank is apolitical. They would be more likely to hold off on a reduction to interest rates because of hotter-than-expected Consumer Prices Index (CPI): if they decide to do this, the election gives them a good excuse to not cut in June without an adverse market reaction.

 

We still believe that June’s interest rate decision is uncertain, and cannot completely rule out the possibility of a June cut. The next CPI release is 19th June, and market expectations can by swayed by one piece of data just as much as another.

 

Elsewhere, Emmanuel Macron has called a shock snap parliamentary election in France, and Mexico’s first female president, Claudia Sheinbaum, won the election with a huge 59.2% of the vote! Domestic markets didn’t take well to the landslide victory, and themselves, slid on the news. Investors are concerned that the Morena party could shake up the business environment with constitutional reforms.

 

And finally, in India, Narendra Modi won his third term as prime minister, but his party, the BJP party, lost its outright majority. India now has a newly formed coalition government spelling some uncertainty for markets: after an initial drop, markets recovered from the shock. Investments in Mexican and Indian companies sit within the emerging markets asset class, and typically make up a small part of a globally diversified portfolio.

 

We’ll see you next time.

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