UK election update

UK election update

With two days left before the election, the polls suggest that it will be an easy win for Labour, the question is the magnitude of their victory. The final polls before election day have seen support for Labour slip. The latest YouGov poll sees Labour winning 36% of the vote, and the Conservatives on 18% and Reform on 17%. However, the Ipsos Mori poll sees Labour winning 43% of the vote, the Conservatives on 23% and they have Reform only winning 9% of the vote.

Could support for Reform collapse and narrow Labour’s lead?

The top three issues that are most important to UK voters are the economy, health and immigration. Interestingly, leaving the EU is well down the list of voters’ most important issues, with only 13% of people citing this as an issue that is important to them, according to a survey from YouGov. This could lead some to question whether Reform will do as well as some are predicting. Added to this, there have been several defections from Reform to the Conservatives this week, which may boost the Tories in the final stages of this election race but is unlikely to keep them in power.

Thus, while it seems like a Labour win is a done deal, even if more Reform candidates’ defect to the Conservatives, the question of the magnitude of Labour’s win is still unknown and could shift as we reach election day. There is a chance that Labour’s victory will not be as large as some had predicted, with some outlets expecting them to win a record-breaking 400 seats.

Voter’s are confident in Labour on the economy

Research that we have commissioned at XTB has found that the UK is more trusted than the Tories in terms of the economy, business and the stock market. The poll of over 1000 stock market investors, found that Labour was leading the Tories on how they would handle the economy at 60% vs. 40% for the Conservatives, and Labour also came out in front in terms of how trusted they were with the stock market, at 54% vs. 46% for the Conservatives.

Nearly all industry sectors preferred a Labour victory rather than a Conservative one. Voters thought that sectors including housing, autos, tech, pharma and retail were likely to perform better under a Labour government, the only industry where voters though the Conservatives would do better is banking.

Labour expected to raise taxes

However, our poll showed that voters trusted the Conservatives more when it came to taxation, and that they expect taxes to go up under a Labour government. There was also a lot of uncertainty when it came to which party would be better for private pensions. 61.4% of voters told us that they did know who they would feel more confident about their pension plans being under a Labour or Conservative government.

UK asset markets stable as we lead up to election, although FTSE 100 slips

These poll results are interesting for a couple of reasons. Firstly, it explains why UK asset markets have mostly been stable in the lead up to this election. Unlike French stocks that have fallen sharply, the FTSE 100 eked out a near 5% gain in June. Bond yields have been stable in the UK, and UK gilts are outperforming French and US bonds in recent days, as political risk premiums are added to US and French debt, but not to UK debt.

While the FTSE 100 recorded a gain in June, only 27% of the members on the FTSE 100 posted a positive performance in the month leading up to the election. This suggests that a narrowing of the breadth of stock market gains is spreading around the world, and it is not only the US markets that face concentration risks. Only 30% of FTSE 250 companies managed to record a gain last month. Thus, on an individual stock basis, the balance between advancers and decliners on the FTSE 100 has tipped in favour of decliners.

Labour unlikely to be reason for UK stock market’s narrowing breadth

There has not been an overarching theme driving the FTSE 100 in recent weeks. Considering there are fears about when interest rates will be cut along with global election risk, it is not clear if UK stocks are seeing more losers than winners because Labour is expected to win the election. Instead, it looks like the UK is following global trends. There is also a noticeable investor preference for US stocks rather than European stocks, as you can see below, which cannot be blamed on Labour.

Chart 1: S&P 500, FTSE 100, Eurostoxx 50 and the Cac 40, normalized to show how they move together.

Source: XTB and Bloomberg

Labour’s expected win calms bond and FX market

However, we do think that the prospect of a big win for a non-radical major party in the UK is having a calming effect on the pound and the bond market as we lead up to the UK election on Thursday. UK bonds have outperformed US and French 10-year bonds in recent days, which suggests that there is less of a political risk premium attached to UK debt.

Likewise, the dollar may be dominating the G10 FX space right now, but the pound has shown resilience. It is one of the top three performers vs. the dollar in the past month, and it has outperformed the euro, the yen and the scandi currencies in recent weeks. Short term volatility in GBP/USD is also at low levels, suggesting that the market is not expecting the pound to sell off in the wake of this election result.

Of course, if there is an unlikely outcome: a win for the Conservatives or a hung parliament, we could see volatility quickly flare up across UK asset prices, however, we think there is a very low probability of that happening.