With a change of UK government becoming increasingly likely and with elections in the EU, and France, Frédérique Carrier, head of investment strategy at RBC Wealth Management in the British Isles and Asia, together with other wealth managers, discusses investment opportunities in 2024.

With the Labour Party commanding a lead in the UK opinion polls, it seems very likely that it will lead the new government, according to Frédérique Carrier at RBC Wealth Management.

This is also the view of many wealth managers. “The opinion polls are strongly skewed towards a victory for Keir Starmer’s Labour,” Trevor Greetham, head of multi asset at Royal London Asset Management, said in a note. Matthew Belcher, investment manager within Square Mile’s investment management team, also expects that the Labour Party will win an historic victory in the general election on 4 July. See more commentary here and here.

"A Labour government would try to stimulate growth through making it easier to acquire permits to build new homes and commercial buildings, and resetting relations with the EU, still its largest trading partner. Labour has also promised to expand the scope of responsibility of the British Business Bank, which invests in small and medium enterprises, and to look to nationalise the rail industry,” Carrier said.

“Labour’s proposed budget looks to increase investment in green industries, as well as healthcare, schools, and childcare,” she said. While the Conservative government had been actively outsourcing services, Labour would take back control of several activities to lower the bill paid to consultants.

To fund its policies, Labour plans to close tax loopholes and increase a number of specific taxes, such as the energy profits levy. It has pledged to restrict the resident non-domicile (non-doms) regime from shifting money offshore, which Wealth Club estimates will raise £430 million ($544 million) a year, equivalent to a 6 per cent increase in the overall inheritance tax take. There are also concerns that Labour may go further with the inheritance tax side, such as make it more difficult to gift money and assets, like farmland, tax free. Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. Another possibility that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief.

“Labour has also committed to keep the corporate tax rate at 25 per cent for the duration of parliament and to maintain the income tax top rate and capital gains tax,” Carrier continued.

“The new government will likely find that its policies will be restricted by the weak national finances, with the fiscal deficit exceeding 4 per cent of GDP and government debt just above 100 per cent,” she added. Belcher also highlighted how markets have not responded significantly since the election was called, nor to developments during the campaign, possibly because many investors consider the result a foregone conclusion.

Asset allocation
Carrier believes the composition of the UK equity market, including its high weighting to commodities and defensive sectors, means that UK equities at the index level will remain inextricably linked to either the “value” factor outperforming “growth” or defensives outperforming cyclicals, or both.

Within the UK equity market, she believes that high-quality large-cap stocks which are well placed to benefit from structural (long-term) growth tailwinds while trading on reasonable valuations, often at a discount to their global peers listed overseas, remain an attractive area of opportunity. Carrier also sees selective opportunities in domestically focused UK stocks, where, encouragingly, the economic backdrop appears to be improving. In her view, the low valuation of UK equities means that takeover interest in UK companies from international competitors and private equity is likely to remain elevated.

Continental Europe
In the short term, Carrier believes that attention will likely focus on EU politics and the fallout from the June European parliamentary elections and the July French legislative elections.

She does not anticipate a reversal of European policies despite the advance of far-right parties, as the centre retained more than 55 per cent of the votes. “However, the green parties’ poor showing will likely delay the implementation of the bloc’s climate agenda,” she said.

She thinks it is still unclear whether French President Emmanuel Macron’s strategy to call a legislative election will pay off. In doing so, he hopes his party may be able to redress its marked loss to the far-right National Rally (Rassemblement National or RN) party.

“Markets worry that the RN’s expansive fiscal policy at a time when the country’s fiscal deficit exceeds 5 per cent could destabilise the region, much like Greece did in 2012,” Carrier continued. This would be problematic as France is the second-largest economy in the eurozone. Ultimately, she believes that if the RN becomes part of the government, it would likely align itself with Brussels’ fiscal policies.

Asset allocation
Mark Haefele at UBS Global Wealth Management meanwhile believes that the probability of no clear majority emerging is high, leading to potential political instability. Haefele thinks there are implications for the wider European market given that one of the positive cases for European equities was linked to potential inflows from foreign investors, who may now be deterred by political uncertainty. Benjamin Melman, global chief investment officer at Paris-based Edmond de Rothschild Asset Management, has also lowered risks within his asset allocation, first on European equities, following the announcement of the snap election. 

Daniele Antonucci, chief investment officer at Quintet Private Bank, parent of Brown Shipley, who also believes that the French elections on 30 June and 7 July are more of a market mover than the UK ones, is slightly underweight in European equities. See more commentary here and here.

Haefele prefers quality bonds, expecting yields to fall as markets price in a central bank rate-cutting cycle. He sees value for investors in select investment grade bonds from multinational companies that are less exposed to national politics and offer attractive yields.

Carrier nevertheless highlighted the recovery in the euro area that is taking place. “Inflation is waning, and the European Central Bank (ECB) is cutting rates, which should underpin domestic demand,” she said.

The MSCI Europe ex UK Index reached a 12-month high in June 2024. The uncertainty of the French legislative elections ushers in a period of volatility. Carrier maintains her market weight position and balanced approach, seeking exposure to high-quality European stocks, especially in the technology, industrials, and healthcare sectors alongside selective opportunities which can benefit from the improving macro backdrop and relatively inexpensive valuations available today. Should a deteriorating political situation lead to near-term moves appearing overdone, she would seek to add to positions.

Belcher meanwhile believes that investors are better served by not trying to predict election results and repositioning portfolios to anticipate election outcomes in the UK, US or elsewhere. His long-term view, factoring in capital markets assumptions and the macro-environment, leads him to keep his portfolios fully invested with good diversification and a bias towards quality businesses in his underlying funds. He thinks this will deliver the best risk-adjusted returns for clients over the long-term. Haefele also thinks that political biases can be counterproductive for investment portfolios and that investors should focus on the long term.