The last decade has been politically eventful for a UK government bond fund manager. From the Scottish independence referendum and Brexit to countless leadership contests – politics have been front and centre. 

This all came to a head in September-October 2022, with Liz Truss and her government’s market-shaking budget. To this day, what Macbeth is to thespians, Truss is to gilt fund managers. Merely mentioning her name is considered bad luck in some circles (although we’ll risk it here).

Truss was replaced by Rishi Sunak. For many, he will be known as the man who finally broke the Conservative Party. Despite this, his tenure has given markets a breather. Politics have taken a back seat to spiralling inflation and central bank policy. So, after 18 months, we’re rested and ready to re-enter the political fray.

There’s no doubt 2024 is the year of politics. Sixty-four countries, covering around 49% of the global population, will hold elections. Our emerging debt colleagues will be busy. But only two elections matter for us.

In November, Donald Trump will face President Biden in a rematch few voters apparently want. Meanwhile, the UK general election is pencilled in for autumn, although could come as late as January 2025.

Market recap

Before we go any further, let’s give a quick update on 2024’s market moves. If you read our last article FOMO & the FOMC you would know that we expected yields to move higher in January, and we would use this as a buying opportunity. Yields have indeed climbed but become range bound. US economic data has been more resilient than many expected. This has influenced expectations for rate cuts. Markets have reduced their forecasts for the quantum of cuts and slightly delayed their expected start. Our view hasn’t changed: central banks will cut, yields will come down, but patience is required. 

Chart 1: 0.25% cuts removed from market pricing

Back to UK politics

Looking at the numbers, we think it’s fair to say Keir Starmer will be the UK’s next prime minister, with Rachel Reeves his likely chancellor. The polls widened significantly following Truss’s reign and haven’t shifted since.  

Chart 2: YouGov Opinion Polls

But what does it mean… should we fear Keir?

The answer for 2024 is, in our view, no.

What do we expect from the Labour Party?

If the economy was in a better place, we think the Labour Party would spend when it came to power – or at the very least announce spending plans. Starmer and Reeves, however, understand that unfunded spending sprees are inadvisable.

Reeves calls her brand of economics Securonomics. She sums it up as, “economic security, stronger family finances and good jobs first”. What does that mean? We’re not entirely sure. But Securonomics won’t break the economy, nor put a flame under already hot inflation. And, unlike September 2022’s budget, it won’t propel UK gilt yields to the moon.

We do expect the state to play a far more active role under a Labour government, particularly in industrial strategy. Green energy and green industries will take centre stage. We also think we’ll see deeper collaboration between the state and private enterprise. All this will take place under the banner of fiscal responsibility.

As for spending, the Conservatives have left the cupboards bare. The fiscal headroom leaves a paltry £9.8 billion in the coffers; the historical average is closer to £25 billion (see OBR chart below). The government can easily change fiscal rules, and we expect Reeves to do so at some point. That said, her adjustments will be monitored and measured. She’ll be aware that the market, particularly international investors, will scrutinise any fiscal changes. The ex-chancellor Kwarteng debacle remains fresh in many people's minds.

But while Labour can change fiscal rules, they must take into account the annual gilt remit (the number of gilts the UK needs to sell to fund its spending). That number is already sky-high. The market will adversely react to any significant increase. 

Chart 3: Available Fiscal Headroom

In short, Labour will need to offset any additional spending. And that means tax hikes.

The saving grace is they should have time to enact their policies. Over 60 Conservative MPs are stepping down at the next election. The Tories' polling numbers make for grim reading. The March tax cuts did little to move the dial. We think the likely outcome is a comfortable Labour majority and (barring any disasters) at least two terms in power. Starmer and Reeves need to lay the groundwork in the first couple of years and hope the economy allows them the breathing space to make more fundamental spending plans further down the line.

What does this mean for markets?

As it stands, not a lot.

The election calendar doesn’t currently influence our projections for the Bank of England (BoE) cutting cycle.

Do we fear Keir? Not this year.

One outcome that might rattle markets is a surprise Conservative win. But we’ll cross that bridge should we ever come to it...

What about the other election?

The US election could move the market…bigly

Donald Trump will again face President Biden. It’s going to be a tight race.

A lot could happen between now and 5 November. US data has been more resilient than markets expected. Unlike the BoE, we think the US Federal Reserve (Fed) will be mindful of the upcoming election. According to market pricing, the first cut has already been pushed back from March to June. If there’s any further delay, the Fed will have to decide whether it wants to reduce rates so close to a highly volatile election. We wouldn’t envy Fed Chair Powell’s position if that comes to pass.

After the election, markets will face either Biden’s spending plans or more of Trump's tax cuts. Platitudes aside, neither seems overly keen to tackle the US’s ballooning deficit. Both approaches would hinder the Fed’s ability to cool the hot US economy.

Tallying the votes – does the year of politics impact our view?

In the UK, we believe no. Are we 100% clear on what Reeves and Starmer will do? No. But will they act in Truss’s cavalier manner? No.

Over in the US, the election will be market moving. Are investors currently focusing on the result? No. Will they? Definitely. Watch out for a future piece on the topic.