ETFs
UK ETFs focus on election impact
The U.K. is heading toward a general election on July 4, and history could point to a neutral to positive stock market reaction if Labor ousts the Conservatives, according to analysts cited on CNBC. iShares MSCI UK Small Cap ETF EWUS gained 9.3% last month (as of May 28, 2024), the best performer among UK ETFs. Election activities and improving economic activities likely boosted this domestically focused fund.
Let’s dig a little deeper.
Stock Market Expectations
Analysts expect a positive stock market reaction if the centre-left Labor Party wins the UK general election, with historical trends suggesting that UK stocks tend to perform better after Labor victories than those of the Conservatives.
Labor leaders, including shadow finance minister Rachel Reeves and party leader Keir Starmer, are determined to commit to fiscal discipline to reduce the country’s debt. Alongside business leaders, they aim to lead the economy with more confidence.
Historical Stock Performance
According to Citi analysis, the MSCI UK index of large and mid-cap stocks has seen a 6% gain on average six months after Labor victories and a 5% decline after Conservative victories since 1979. FTSE 250 generally outperformed the FTSE 100 after the election, with stronger outperformance following Labor victories, a CNBC article revealed.
Defensive and financial stocks generally perform better after elections, with energy stocks performing well regardless of the election outcome. Investors should note thatAlphaDEX Fund First Trust UK FXU, which invests no more than 3% in a stock, andiShares MSCI UK ETF EWU, which has high concentration risks specific to its businesses, recorded returns of 6.9% and 6.4%, respectively, last month. The top 10 holdings section of the EWU fund has approximately 12% exposure to the energy sector.
Past performance of the Labor government
Under previous Labor governments, the UK stock market fell five times, but this cannot be blamed on the party alone. Historical events such as the Great Depression, postwar periods, oil shocks, and financial crises have played an important role, indicating that these falls are event-driven, not election-driven.
Current market perception
Despite historical trends, some analysts, such as John Higgins of Capital Economics, believe that Labor’s return to power would not have a significant impact on investors this time around, given the broader economic backdrop since 2010, quoted on CNBC. After all, the current situation of the global economy largely depends on interest rate policy, the decision of the Fed, geopolitical crises, the transition of the energy market and the boom of AI.
The story continues
Economic situation in the United Kingdom
UK economic growth in the first quarter of 2024 was 0.6% and surveys indicated the improvement would continue into the second quarter. Business and consumer confidence experienced positive momentum. The UK economy notably fell into a technical recession in the second half of 2023, which marked two successive quarters of negative real GDP growth.
Inflation in the UK has fallen from a peak of 11.1% in October 2022 to 2.3%, just above its target. Consumer prices fell sharply in April after an increase of 3.2% in March and their lowest level since July 2021, when they were at 2.0%. But the April figure fell short of economists’ expectations (polled by Reuters) for a 2.1% increase. The Bank of England’s inflation target is 2%.
That said, we would like to note that the Bank of England is likely to be cautious about cutting interest rates as services sector inflation remains high at 5.9%. Inflation did not fall as sharply as expected in April. The UK economy is approaching a soft landing, with growth likely to resume in 2024 and strengthen further in 2025, the IMF said.
Sterling Outlook
Analysts expect the outlook for the pound sterling and UK government bonds to remain linked to the interest rate outlook due to the lack of fiscal divergence between the parties. Market reactions are expected to be modest, as historical precedent suggests.
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iShares MSCI UK ETF (EWU): ETF Research Reports
iShares MSCI UK Small-Cap ETF (EWUS): ETF Research Reports
First Trust Utilities AlphaDEX ETF (FXU): ETF Research Reports