UK Election Update and Perspectives on Party Control

Editors’ Note: MarketMinder is politically agnostic. We favor no party nor any candidate and assess developments for their potential market impact only.

A hotly contested election took a turn Thursday, providing a reminder that early polls aren’t much use in predicting outcomes. And no, we aren’t talking about the guilty verdict in former President Trump’s trial in New York State. With opinions about him and President Biden so crystalized, the trial probably doesn’t shift much for November. That race will still hinge on a handful of swing states and both parties’ campaign apparatus.

We are talking about some twists and turns ahead of the UK’s July 4 election, where momentum may be swinging away from the opposition Labour Party. After some internal strife, there are whispers that the mooted landslide might not happen after all. Perhaps. But either way, we don’t think it matters to stocks much. Neither UK party has a monopoly on good or bad stock returns.

When Prime Minister Rishi Sunak kicked off the campaign last week, it looked like Labour and its leader, Keir Starmer, had pole position. Not only did they have a 20-point polling lead, but when Sunak announced the campaign during a rainstorm with no covering and no umbrella, the resulting memes (which rebranded “getting soaked” to “getting Sunaked”) seemed to illustrate the Conservatives’ fate.

The next few days also seemed to favor Labour. It has far fewer Members of Parliament (MPs) standing down at the election than the Conservatives, giving it better name recognition. Plus, Starmer chose to plug centrist candidates into most vacated constituencies, shoring up his reputation as a moderate after the party’s hard left turn under former leader Jeremy Corbyn.

But Thursday, a dust-up with Deputy Labour Leader Angela Rayner—recently cleared of tax evasion allegations—changed the calculus. We won’t rehash the details, but she broke with tradition and disagreed publicly with one of Starmer’s key decisions. Several high-profile party members sided with her, and on Friday, Starmer announced a U-turn.

This landed Labour infighting in the headlines for days, drowning out its policy proposals and giving the impression of a party in turmoil. Starmer has long sought to draw a contrast between Labour’s stability and the Conservatives’ bickering. That argument seems tenuous now, replaced by questions over his leadership.

Meanwhile, the early election call seems to have caught grassroots conservative party Reform UK off guard. Its honorary president, Nigel Farage, has announced he won’t run. And faced with the need to release concrete policy proposals, the party seems to have fallen flat. So have the centrist Liberal Democrats, whose policies remain shrouded in mystery.

But Sunak and the Tories have been busy, pledging tax cuts for pensioners and vaguely alluding to broader relief. Shrewd reporters pointed out that the pension tax cuts simply undo some of the Tories’ earlier tax hikes, but overall, the vibe surrounding them seems to be warming. Talk of a Labour landslide is quieting.

So with five weeks to go, the outcome is anyone’s guess. Pollsters warn Labour’s edge is probably narrower than surveys imply. Reform UK may siphon less of the conservative vote than anticipated. The parties have yet to release their manifestos. Who will gain the policy momentum? Will the Tories or Labour better project stability from here? Will Starmer or Sunak be more at ease with voters? What of turnout?

We wrote last week that the campaign would probably heighten uncertainty. That seems to be manifesting now, with a hung Parliament a realistic possibility that didn’t get much ink a week ago. Fraught headlines arguing one side or the other is better for the UK economy and market also abound. To us, it is perplexing. For the past couple years, both parties have sounded similar notes on economic policy.

But also, market history shows stocks don’t play favorites. Exhibits 1 and 2 present two ways to see this. The first shows annualized returns under all UK governments since MSCI UK Index data begin in 1970—all in pounds, to avoid skew from currency swings. For simplicity, we count majority governments that spanned multiple prime ministers as a single government. In a Parliamentary system where party matters more than party leader, this seems the cleanest way to do it. But we did tease out minority and coalition governments, which is key given the possibility of a hung Parliament now.

Exhibit 1: Annualized Returns by UK Government

Source: FactSet, as of 5/31/2024. MSCI UK Index total returns in pounds, using monthly index levels due to data availability. If the transition happened in the month’s first half, calculations start from the end of the prior month.

Amusingly, the best and worst return happened under a single Labour prime minister, Harold Wilson—he of the price controls and other policies we would consider net economic negatives. But his minority government overlapped with a wicked global bear market, while his majority administration captured the big global rebound. Lesson one: Global trends matter. A lot.

Lesson two: Popular narratives don’t tell the whole story. Jim Callaghan’s minority government included the infamous Winter of Discontent, with tough times and widespread industrial action. But it also boasts the second-best annualized return of any government. Meanwhile, the lowest positive return happened under the business-friendly Labour government of Tony Blair and Gordon Brown—a stretch most remember as a time of boom and sunny optimism.

Which brings us to lesson three: Market cycles matter. These long governments in particular include bull and bear markets, yielding a more nuanced reality than the cumulative returns imply. The antidote is Exhibit 2, which presents these same returns in a line graph. Suddenly, the Blair/Brown years look better, with the Tech bubble and Global Financial Crisis bear markets punctuating an otherwise nice bull run. We also see the bear market that marred Wilson’s early returns began under Conservative Ted Heath—and that bear markets happened under Thatcher and Johnson. The bull/bear tally is basically a draw.

Exhibit 2: UK Stocks Don’t Play Favorites

Source: FactSet, as of 5/31/2024. MSCI UK Index total return level, monthly, 12/31/1969 – 5/31/2024.

In our view, UK returns under the next government will probably have less to do with the party in power than broad global trends, which sector is in favor, economic drivers and the degree of gridlock within Parliament. The latter looks likely to be high no matter the electoral outcome—thank the infighting on both sides for that. And if there is a minority or coalition government, those are gridlocked by definition. Hence, political risk likely stays low. That should extend tailwinds, especially as uncertainty falls, allowing the UK to keep participating in this global bull market.

6/3/2024 Update: Since publication of this piece, Nigel Farage became leader of the UK Reform Party and announced he will stand as a candidate for Parliament. He also ruled out forming an electoral pact with the Conservatives. This largely highlights all the twists and turns campaigns—even those that are short like this election’s—can take.