UK Stocks Shining as Political Regime Shift Seems Guaranteed

British voters have already discounted a political annihilation of the Conservatives on July 4th. And while there is unlikely to be a radical policy shift from the Labour Party, Keith Hiscock of Hardman and Co. explains how both the economy and stock market may respond.

Summary – IBKR Podcasts Ep. 168

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s podcast. My name is Andrew Wilkinson. I’m delighted to welcome back Keith Hiscock. Keith is Chief Executive at Hardman and Co in London. Welcome, Keith. 

Keith Hiscock 

Thanks very much for having me. 

Andrew Wilkinson 

Well, it was announced recently that the UK would have a general election on July the 4th. So while we’re celebrating Independence Day here in the United States, you’ll be going to the polls over in England. Should investors worry about the coming general election? 

Keith Hiscock 

So you’re right, election is July the 4th. It could have been as late as January, but in our system, the government has the right to choose the date, and it decided to go early. So yeah, so your question is, should you and investors worry about the coming election?  

Well, I think the overwhelming evidence at the moment from the polls is that the Labour Party will win. And will win handsomely. So that means that we’re unlikely to have a coalition or to have a government with a very weak majority, which in a sense is a good thing for investors because there’s certainty there. You know, you’re not going to have another general election in six months or something like that.  

I guess the real question is, what does it mean for policy? How much of a change? And the answer is probably not very much. If you believe all the promises that are coming from politicians on all sides, they’re going to work on improving public services and spend more on the public services, whilst ruling out pretty well every kind of tax rise. So it’s quite difficult to see how you can square that circle.  

But I think the Labour Party’s going out of its way to say we’re not really going to change very much apart from a few things like, you know the non-doms will get taxed higher and you know, capital gains tax might change. But in terms of general policy, no, they you know, they want to be reassuring. This is not the previous Labour leadership under Jeremy Corbyn, which was terribly left wing. It would have had a dramatic impact on the UK economy. The Labour Party wants to reassure investors that everything’s going to be very much the same. So the answer is probably won’t see very much change in policy that will affect investors. 

Andrew Wilkinson 

The background is very interesting here because we’re heading into a general election with an economy moving along at a certain pace, but the electorate doesn’t like it. What can you frame the background for us today? 

Keith Hiscock 

OK, so the background is that obviously like all economies, we went through a recession with COVID. We’ve seen a sharp recovery from that. But basically like the European economy, the UK economy is just stumbling along without very much growth. But without a recession either.  

Now the good news is inflation has come down quite substantially, and that was one of the key aims of the conservative government and you could argue they delivered on that. So in the UK, the high for inflation was over 11% in late 2022. The latest numbers are down to 2.3%. That’s almost where the Bank of England is targeted to be.  

So in a sense that’s a great success. Of course, you can very well argue that’s not all  because of action by the government. A lot of it’s to do with the rollback of fuel prices, which obviously shot up dramatically after the Ukranian invasion by the Russians, so that’s all quite stable.  

Then, of course, investors in the market turn to the question of well, are we going to start to see rate cuts now? Because rates were obviously used, an increase in rates was used as a way of trying to control the economy.  

In the UK, the next meeting of the Monetary Policy Committee, which is what sets interest rates is the 20th of June and there won’t be another one before we have an election.  

And I think the general feeling now is that there won’t be a rate cut at that meeting, but there’s equally a very general impression that we are at the peak and we will start to see rates come down in the autumn. 

Now we’ve already had the ECB, the European Central Bank, a week or two ago, cut rates there from 4% to 3 3/4%, but the UK and the US monetary authorities are just holding back on that. So you know there are clearly rate cuts coming through, but they’re perhaps a bit slower than we might have thought a month or two ago.  

As I say, we saw a bit of a technical recession, I mean you wouldn’t notice it because it was so tiny, in the UK last year. We’ve got a gradually improvement in GDP being forecast, but you know it’s not going to set the house on fire, is it? We’re talk about perhaps .8% growth in GDP in 2024, 1% in ‘25. There’s a bit of an uptick in in in unemployment, but those have been around for a few years. We’ll think that unemployment today is actually a very low figure, compared to what it has been. So I think the UK is echoing pretty much what’s going on in the European economy, which is that the worst outcomes have not occurred. Inflation looks as though it’s under control. We’re looking forward to a period of a gradual rate cut, but we’re not seeing a boom in GDP yet, at least.  

Andrew Wilkinson 

Is the UK, beyond the election, the best place to invest? What’s the appeal to investors? We have the US economy not really slowing down in response to tighter monetary policy. As you mentioned, there’s been a start in the rate reduction cycle in Europe. So what’s the big appeal about London post-election? 

Keith Hiscock 

Well, London has, first of all been a laggard as a market, an equity market for quite a long while, partly for structural reasons, partly views, you know, international investors might have taken a negative view about it post Brexit, the effect of Brexit.  

But I think we might be entering quite an exciting period. So first of all, the FTSE has started to move. So go back to almost this time last year, July last year, the FTSE was about 7200. We got up to 8400, I think it’s about 8150 at the moment, so that’s seen quite a strong growth.  

What we’ve seen is a lot of takeovers in the UK equity market. So both private equity and overseas corporates are looking at the UK and saying there’s some really interesting businesses here. They look really cheap in relative terms. And so, a lot of companies have been taken out of the London market and at some stage that cash is going to get recycled into the market.  

But we’ve seen a dearth, bit like most other countries, a dearth of IPOs, for example, because there wasn’t any cash around to support them. We’ve got the first inclination or the first indications, rather, that things are getting slightly better.  

So yesterday Raspberry Pi, which is a low-cost computer manufacturer based in Cambridge, floated, went to quite a big premium straight away. Now that’s quite a good signal to other investors.  

So I think there is an argument that whilst the UK equity market might have been sidelined by investors for quite a long while, there are some signs that there is going to be more interest and it potentially looks really quite cheap on an international comparison basis. 

Andrew Wilkinson 

Keith Hiscock, Chief Executive at Hardman and Co. in London. Thank you very much for being my guest today and hopefully you’ll have a decent summer and please come back the other side of the election and give us an update. 

Keith Hiscock 

Thank you very much indeed. 

Andrew Wilkinson 

Thank you. And to the audience, if you like today’s podcast, please don’t forget to sign up wherever you download your podcast from. 

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