How Are Markets Reacting to Election Results?

Spotlight – 2024 UK and French elections

More than one billion people around the world have already voted in various elections in 2024 (source: Time), the UK and French elections are a part of this history-making year.

This week, the UK General Election got underway with the public heading to the polls on Thursday. Pre-election polls pointed to a big Labour Party majority and they were right with Labour ending the Conservatives’ 14 year reign as primary governing party. So what does this mean for the UK economy and investments? We are not expecting any major surprises in markets or policy over the next one to two years. Labour (along with the Conservatives) stated clearly they will adopt the UK’s Fiscal Spending Rules¹. The implication of this is that room for big policy changes, like tax cuts or spending increases, are limited. We therefore expect the impact of tax and spending policy on UK economic growth, inflation and interest rates to also be limited.

There are important policies that will shape important structural factors in the UK economy (like addressing the UK’s long-term weak productivity growth or improving the UK’s trading relationship with the EU). These, and other factors, are hugely important for future economic growth and wealth creation in the UK. However, they are typically long-term and hence can be gradual in terms of the pace of feeling their impacts. This relatively low level of election, policy and economic uncertainty has meant the impact on UK financial markets so far has been relatively low.

This week the French have also been to the polls with the French snap elections underway. Election, policy and economic issues look quite different and much more uncertain in France. This has meant the reaction of the French financial markets has been different with a much bigger impact on asset prices recently. The announcement of the snap elections had immediate repercussions on financial markets with the CAC 40 equity index, (which represents the 40 largest companies listed in Paris) falling by 1.4% on the first trading day following the announcement (see chart below) and the Euro dropping by 0.6% against the British pound, hitting its weakest level in nearly two years (source CNBC). These immediate reactions reflect investor anxiety over the political instability and potential economic policies that could emerge from the new government, if indeed a majority can be secured. The first round of voting saw the far-right Rassemblement National (RN) or the left-wing Nouveau Front Populaire (NFP) leading with President Macron’s Ensemble alliance in third behind. There is a good chance there will be no majority government, and it may not be possible to form a stable coalition government, which could extend this uncertainty.
 
The financial volatility so far has largely been limited to French assets – it has not passed through to the markets of other Eurozone countries and the impact on the Euro and Dollar exchange rate has been small. That is to say, markets, so far, see this as primarily a domestic French issue.

Source: FactSet – French equity markets shown by CAC 40 Index
 
Past performance is not a reliable indicator of future performance. The value of investments, and any income from them, can go down as well as up and is not guaranteed. You may get back less than you originally invested.
 
¹ These require the debt-to-GDP ratio to fall within a five-year horizon and the ratio of the annual budget deficit to GDP to be below 3% by the end of the same period.

The Noise​

• Sir Keir Starmer is set to become the UK's first Labour prime minister since 2010 following a decisive general election victory. Labour has secured a substantial parliamentary majority of 174 seats, marking a significant shift from the Conservative party, which experienced a notable decline in support. Sir Keir will be officially appointed by the King and will address the nation from Downing Street today. Outgoing Prime Minister Rishi Sunak has pledged to stay on as Conservative leader until a successor is chosen. Labour's campaign focused on economic growth and public service reforms, pledging to reform UK employment law, renationalise most passenger rail services, establish a state-owned energy investment and generation company, and enhance green investment.

• Following the 2024 UK general election, financial markets responded positively to the Labour party’s landslide victory, seeing it as a source of political stability. The FTSE 100 experienced gains of 0.4%, driven by investor optimism about economic clarity under the new government. The domestically focused FTSE 250 surged in London, climbing 1.8% to its highest level since April 2022. This rally was largely driven by housebuilders, which rose 2.5% amid optimism that Labour's anticipated changes to planning laws will stimulate development. European stocks also rose to more than one-week highs in response to the UK election result. The pan-European STOXX 600 index was up 0.4%, nearing its highest level since June. Meanwhile, the pound also strengthened 0.1% against the dollar, reflecting market approval of the election outcome. This response highlights a broader investor sentiment that favours the predictability and stability anticipated from Labour's administration​.

• In other news, Bitcoin's decline deepened today, marking a fourth consecutive drop amidst fears of government and creditor sell-offs following a bitcoin exchange collapsed. The digital currency plunged by up to 8.1%, hitting its lowest since February at $54,300. This downturn, down 25% from March's peak, contrasts with rising stock markets, exacerbated by the bitcoin exchange Mt Gox's $8bn bitcoin return to creditors.

The Numbers

The Nuance

The UK and France present contrasting post-election landscapes, each with unique implications for their financial markets and economies.

In the UK, Labour's landslide victory hopefully brings stability. With a clear majority and commitment to fiscal rules, immediate economic and policy uncertainties are anticipated to be low. While structural reforms targeting productivity and capital markets are pivotal, their impact will unfold gradually, tempering market reactions. Conversely, France faces heightened uncertainty following a potentially fragmented election outcome. With no clear majority likely and unresolved fiscal challenges, French financial markets have been volatile.

The divergence in market responses between the UK and France underscores broader economic contexts. UK markets have remained relatively stable due to anticipated policies and manageable uncertainties, focusing on long-term structural reforms. In contrast, French markets react strongly to electoral unpredictability and fiscal concerns, influencing asset prices domestically while showing limited spillover to broader Eurozone markets.

Looking ahead, investors monitor France's political developments closely, gauging potential impacts on fiscal discipline and market stability. Opportunities may arise amid fluctuating asset prices, contingent upon clearer policy signals and economic resilience across Europe.

In summary, while it is expected the UK will experience a period of predictability under Labour's decisive mandate, France navigates complex coalition dynamics and fiscal challenges post-election, shaping distinct trajectories for their respective financial markets and economic outlooks.