Please see below Invesco article regarding the upcoming UK local elections. Received today -28/04/2023.
How will the elections impact UK markets?
UK politics and the UK economy are not the same as UK equity markets. Only around 25% of revenues in the FTSE All-Share come from the UK.
“Put simply, the outcome of the May election in Barnsley will have no discernible effect on the prospects for AstraZeneca’s world leading immuno-oncology pipeline; the size of the swing in North Tyneside will not affect sales of Unilever in Indonesia. Yet together these two companies alone comprise almost 12% of the FTSE All-share index,” said Martin Walker, Invesco Head of UK Equities.
That’s not to say we are in any way complacent about different prospects of businesses under future Conservative or Labour governments.
“It’s easy to see how policy on, say, energy supply, provision of utilities in general, or housing policies might potentially cause winners and losers, depending on the outcome of the general election. Indeed, our own investment analysis already factors in where we see opportunity and risk under different scenarios. As fund managers, our job is to stay alert – particularly at a time of heightened volatility,” Walker said.
When is the next UK election?
Voters across 230 English local authorities will head to the polls on Thursday 4th May. About 8,000 council seats are up for grabs across a mix of metropolitan boroughs (traditionally Labour areas) unitary authorities (where Labour is expected to make gains) and district councils (traditionally Conservative areas). The last time these seats were elected was pre-Covid, in 2019, when Theresa May was Prime Minister, Jeremy Corbyn was Labour leader and Parliament was heading for a Brexit deadlock. Then, the Conservative lost more than 1,300 council seats. This was their worst local election result since 1995 – while Labour lost 80 and the Lib Dems emerged with more than 650 gains. The National Equivalent Vote share had Labour and the Tories tied neck-and-neck on 31%, with the Lib Dems winning 17%.
Political momentum with Sunak
The political momentum currently lies with Sunak. After a torrid first 100 days in office, Sunak has begun to make some political headway.
“Agreement of the Windsor Framework, stronger relations with the EU, a well-received Spring Budget and the handling of the collapse of Silicon Valley Bank’s UK branch have strengthened his leadership after a rocky start. As a result, his stock with the Tory grassroots has risen,” said Hook.
And voters are noticing too. Sunak is on a par with Keir Starmer on the question of who voters think would make the most capable Prime Minister; and Labour’s average poll lead over the Tories is down by 5 points since January.
Starmer’s task: demonstrate a decisive vote share lead
Sunak’s progress shouldn’t be overstated. A 15-point lead in a general election would deliver Starmer a substantial Parliamentary majority. Nonetheless, Starmer is under pressure to show that a poll lead translates into real votes at the ballot box.
Rather than council gains / losses, the key figures to watch, will be the projected National Equivalent Vote (NEV) figures from local elections experts Colin Rallings and Michael Thrasher – which calculate support for each party as if the elections were taking place in every part of the country. As a guide to interpreting Labour’s performance:
- Minimum hurdle: take the mantle of the largest party in local government – a title held by the Tories since 2003.
- Cause for concern: <6 point lead (NEV) over the Tories – suggests Labour are struggling to convert some poll support into votes.
- Good: 10+ point lead (NEV) over the Tories – a feat Labour last managed in 1997, would show Labour on course for General Election majority.
- Excellent: 15+ point lead (NEV) over the Tories – on course for a landslide majority.
How does industry view Starmer?
“In our discussions with the bosses of leading UK companies, it’s clear that there’s a dialogue with the government on matters of importance. Governments (of any colour) understand they need to have a performing banking sector,” said Walker.
“The sector is a significant contributor to the Treasury through the banking levy and surcharge. Our most recent discussions have highlighted that banks and financial services companies are already engaging with Starmer and Shadow Chancellor of the Exchequer, Rachel Reeves.”
In the outsourcing sector, an area of ‘hi-touch’ with central and local government, companies are saying that they’re working on engagement ahead of the 2024 election, and that although governments change, the challenges remain the same. One company pointed out: “the language from Starmer around working with the private sector and partnerships is positive. The depoliticising of the support service relationship is important.”
Segment view: Pensions
The UK pension sector is one of the largest in the world – approximately £1.7 trillion in defined benefits pension scheme assets are on UK companies’ balance sheets, according to McKinsey data from March 20231. The sector experienced significant turmoil when Truss announced her ‘mini-budget’ in September last year2.
“After the political turmoil of the last year, a period of relative stability is much needed. The local elections are a good reminder that all politics is local – and the supply of quality, affordable housing remains one of the most pressing needs facing communities across the country. The political focus is necessarily on provision of social housing, but the reality is that more housing of all tenures is needed – and the private rented sector uniquely fulfils strong demand, government policy and investment returns.”
Stuart Boucher, Head of Local Government Pension Schemes, Invesco
Conservative MPs aiming for re-run of 1992
“Tory MPs are bracing for a loss of hundreds of council seats, if not more. But with the PM’s growing reputation for competence and the apparent ‘softness’ of Labour’s lead, they can also see a narrow path to an unlikely election win in 2024,” said Hook.
If, in a year’s time, inflation is substantially lower, economic growth higher, EU relations stronger and public sector strikes are in the rearview mirror, Tory MPs are hoping that voters might just give a less fractious Conservative Party another look. As such, they’re hoping the next election could be more like 1992 than 1997.
Macro view: Inflation
“UK consumer price inflation was reported to be 10.1% in March. Though down from the October peak of 11.1%, this remains uncomfortably high for the Bank of England. However, with natural gas prices down sharply (among other commodity price declines) and sterling strengthening, I suspect that Sunak’s target of inflation halving during 2023 is likely to be met. This should allow the Bank of England to signal an end to tightening around the middle of the year.”
Paul Jackson, Global Head of Asset Allocation Research, Invesco
Starmer’s challenge: define his vision
For Starmer, whatever the result, pressure will grow for him to set out a more detailed alternative vision for the country.
“Starmer’s core challenge is how to articulate a vision for stronger public services when the public finances are already stretched,” said Hook. “Pledging tax rises on higher earners risks undermining his claim to have pulled Labour back to the centre ground; but higher borrowing raises the spectre of a repeat of the market reaction to Liz Truss’s brief premiership.”
“The third option,” Hook added, “to generate higher revenues from higher growth, would take time and mean Labour are limited in articulating a radical alternative to the current government. This would mean the election could increasingly become a contest between the party leader viewed as most competent: Sunak or Starmer.”
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Adam Waugh
28/04/2023