Despite political uncertainty at home and abroad, the investment market remains remarkably unflustered, says Scott Hansell of Lovewell Blake Financial Planning. With Keir Starmer receiving the keys to Number 10, investors of every political colour will be hoping that his election victory will be the beginning of a period of political stability, following eight years which has seen five Prime Ministers and seven Chancellors of the Exchequer. A change of government often brings a short-term bounce to the markets, but what are the prospects for longer-term market stability? How will a new set of policies influence returns over the term of this parliament? There is some good news. Even before Rishi Sunak called the snap election, inflation was returning to more sustainable levels, and last month finally got down to the target 2%. This in turn is fuelling talk of interest rate cuts, although these are likely to be later in the year , and more cautious, than many expected at the turn of the year. This is due to inflationary pressures remaining in the economy. A good example is the price of energy: the energy cap has come down 7% this month, but leading consultancy Cornwall Insight has said they expect it to rise by 10% in the autumn. We are not out of the inflationary woods just yet. It is a measure of how carefully the Labour party has positioned itself as being economically responsible that the prospect of Rachel Reeves in Number 11 has in no way spooked the markets. The manifesto was all about prudence, stability and prioritising growth, as well as closer ties with the EU, something which should be favourable to asset prices. Of course, election promises and actual delivery are not always the same thing, but if they succeed in delivering the sound economic management and levels of growth which they aspire to, this will be good news for investors. The UK does not live in a bubble though, and there are plenty of political shocks elsewhere which could impact on the domestic economy. Chief amongst these is the American Presidential election in November, which is dishing up a whole new level of uncertainty and potential instability. History shows us that there has only once been a cut in US interest rates after May in an election year, and that was in the extraordinary circumstances of the 2008 crash. So we are unlikely to see Federal rates being cut until 2025 at the earliest. Meanwhile, the world geopolitical situation remains equally uncertain, with conflict in Ukraine and Gaza continuing. Further escalation could yet drive energy and food inflation, increasing market volatility; but the current situation is largely already priced into the market. The fact is that a well-managed portfolio will be geographically diverse, which means that seismic domestic political changes won’t rock the boat, and even world events should have less of an impact. The biggest likely influence on market returns will be the US election, but nevertheless the investment market remains remarkably unflustered.
