The first half of 2024 finished with broadly positive returns across the major indices with the FTSE100 up by 5.6%. The biggest loser was the CAC 40 in France as politics once again sought to derail market progress.

French President Macron announced an early Parliamentary election after a disappointing performance by his own party in the European Parliamentary Election. France has already been censured by the EU for excess spending and now faced the possibility of either a free-spending left wing coalition or an equally free spending but also anti-EU right wing party.

French government bonds consequently fell and at one stage yielded more than Italy and Portugal.

In America politics also played its part as well. A poorly reviewed performance by Joe Biden in the first TV Head to Head with Donald Trump has led to suggestions that he could be replaced as the Democratic nominee.

Markets have now quickly priced in a Trump second Presidency. In the meantime the UK, for once, now appears to be a beacon of political stability as the Labour Party won a decisive majority in the General Election. Kier Starmer and Rachel Reeves have spent many months courting the City and business leaders so the result was not a shock to markets.

It does seem that promises to keep spending and government debt under control are being believed by the markets, at least for now.

As ever, manifesto promises are particularly vague and it is very hard to judge exactly what a Labour Government may mean economically.

The two key areas seem to be Energy and Housing.

What might a Labour Government mean for UK Equity and Bond markets?

This election campaign, as is now typical, was lacking in detail (from all parties) and Labour stuck to broad descriptions of their economic plans with minimal detail. For a clearer (as much as is possible in politics) picture we have to look at Rachel Reeves speech at the Bank of England’s Mais lecture.

Her key strategy appears to be a combination of tight financial controls from the Treasury,
targeted investment supported by City money and reform particularly of planning, both for housing and infrastructure projects.

Termed, “Securonomics” this is “an economic approach focused on stability, investment through business partnership, and unlocking potential across the economy”. Let’s look at each in turn.

First, guaranteeing stability.

Here Reeves plans include strengthening the Office for Budget Responsibility (OBR). This would be by introducing a new “fiscal lock”, guaranteeing in law that any government making significant and permanent tax and spending changes must be subject to an independent forecast from the OBR.

A sensible move and a clear nod to the Truss/Kwarteng crisis, however, the OBR is notoriously
overly pessimistic with its forecasts. Furthermore and not to be made law, but the intention is that the annual Budget must move into balance i.e. day-to-day expenditure is met by revenues with debt falling as a share of the economy.

Governments always say this, but rarely achieve it, especially given the spending plans.

Ultimately, this requires extra tax revenue, either from rate increases, new taxes or from higher economic growth, probably all three. Reeves has though committed to a flat 25% rate for Corporation Tax, the lowest in the G7, but not in Europe, as well as no changes to Income Tax or National Insurance.

However, windfall taxes on certain industries are on the agenda. Markets do expect Labour to introduce a series of tax raising measures, they will have to, otherwise all of the other spending plans can’t be funded. VAT on Private Schools, Non-Domicile Tax arrangements, Inheritance Tax and maybe pensions are targeted. They may not raise enough cash, ad hoc measures such as these never do.

Reeves plans are therefore ultimately predicated on accelerating growth.

Second, stimulating investment through partnership with business In order to stimulate growth the UK economy needs investment, that is clear.

It is also clear that in a marked change from previous governments Labour intends to be a direct investor in infrastructure projects.

Historically, prior governments didn’t pay for anything they just loaded pricing through regulation to make the returns attractive enough for the private sector to invest.

Which worked fine until electricity prices shot up after the Ukrainian invasion.

Reeve’s plan is for the government to work in partnership using as the main vehicle a new British Infrastructure Council. This will include some of the biggest UK and global investment funds amongst its membership.

Furthermore, there will be a revived Industrial Strategy Council which will be placed on a statutory footing. Direct state investment will be delivered through the “Green Prosperity Plan” with two new institutions established, a National Wealth Fund and Great British Energy. £1.7bn a year is planned for the Great British Energy company.

This not intended as a vehicle for nationalisation of existing electricity and gas companies but to develop new renewable and nuclear power projects in partnership with institutional Private Equity money. The aim is to “create 650,000 jobs by 2030 as well as drive industrial renewal, lower bills and create secure supplies of clean energy.” But unlocking private investment will also require institutional reform. Allowing Pension Funds to invest in Private Equity renewable energy funds will require significant rule changes and agreement from the FCA. This was on the agenda during the last government with, so far, little progress.

Reform “to unlock the contribution of working people and the untapped potential throughout our economy”.

A typical politician’s heading that actually says very little, however, for the above plans to succeed reform of pension fund investments and crucially the planning process is at the heart of Reeves whole economic strategy.

As this chart from the Cornwall Institute shows that just 20% of all renewable energy applications have made it through planning in the past 5 years. Labours strategy is impossible to achieve if the current planning process remains as is.

Ultimately infrastructure planning might need to be taken out of Local Authorities hands. Even before AI the UK needed to double electricity production over the next 20
years, a massive undertaking.

Also the promise to build 1.5m new homes in England during the next five years would require a level of housebuilding not seen since the 1960s. In the last year just 150,000 homes were started, way below the average 300,000 completionsrequired to meet the pledge. The last time England saw that many homes completed was in 1969, when new council housing contributed 45% of the total. Reform of the whole planning process and where houses are allowed to be built will be critical for success.

UK Markets

For the UK Bond and Equity markets Reeves and her team have already spent many months touring City and Wall Street institutions and the promises of keeping public spending under control, enforced by the OBR have gone down well.

The potential reform of planning and investment in new energy projects will keep the Private Equity investors happy.

But all of this is predicated on bureaucratic reforms which will not be easy to achieve.

Crucially, no mention was ever made of moving closer to Europe. The policy changes that were needed to make Brexit a success never happened, indeed much remains to be negotiated with the EU.

It may well be that now Europe might just need the UK a bit more than it did and will be open to better terms.

Labour needs growth for its economic plans to succeed, a revised EU deal would give it the numbers it needs. The response of the pound, Gilts and the important domestically focused FTSE Mid 250 has so far been positive, markets like these plans but are also fully aware that the structural reforms needed have historically been very hard to achieve.

The UK is cheap, growth has been fine and should accelerate from here, inflation is at target, the Bank of England is now free to cut interest rates. It is rare for the UK to be seen as a “beacon of political stability”, markets should enjoy it while it lasts!

Global Markets

• The Goldilocks i.e. Inflation keeps falling and yet recession is avoided
• Economics is right i.e. the US will join the UK and Europe in recession during 2024
• The Fed has done too much i.e. a major financial crisis arrives as banks see a wave of defaults
• Inflation returns i.e. inflation isn’t beaten and comes back with a vengeance

For now we remain globally in the Goldilocks scenario, inflation has dropped to target in the USA and the economy is slowing.

Conditions are as close to perfect as they could be for the Fed to start cutting rates. In Europe, it is France’s turn to experience political turmoil.

As we write the Left rather than the feared Right have won the most Parliamentary seats but crucially don’t have a majority. It will be difficult to appoint a Prime Minister. Macron remains unpredictable and could call an early Presidential election.

French Bonds have fallen which for a country as heavily indebted as France could well be a problem.

Memories of the Greek Bond crisis have been stirred. As markets enter the Summer doldrums company earnings will come back into focus, they should be good and start to accelerate from here, helping the Bull to keep running.

July 2024