UK Election to End Years of Chaos for Markets, AXA’s Iggo Says

(Bloomberg) -- UK assets have room to gain as the election next month will likely put an end to years of political chaos that have tarnished local markets, according AXA Investment Managers.

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Chris Iggo, chief investment officer of AXA IM Core, said the pound and UK stocks are cheap and should attract foreign investors who stayed away from the nation’s assets for years. For bonds, the Bank of England’s policy will remain the main driver.

“Change should be good,” Iggo wrote in a note. “There is an argument that things should align to generate a more positive view of the UK among global investors than has been the case since the country voted to leave the European Union.”

The FTSE 100 index has dramatically underperformed the S&P 500 index since the UK chose to leave the EU in 2016. The pound, in the meantime, tumbled after the Brexit vote and never returned to the $1.50 level where it was trading at that time. The currency fell to an all-time low near parity with the dollar in 2022 when former premier Liz Truss proposed unfunded tax cuts and sent markets into a tailspin.

The July 4 vote is expected to put an end to 14 years of Conservative Party governance, with Keir Starmer extending its lead to 44.7%, according to Bloomberg’s poll of polls. The Labour Party hasn’t yet detailed its economic policies, but has vowed iron discipline in its approach public spending.

Iggo said Starmer “gives something of an aura of being boring,” which could be positive if it means policy stability and new policies that are not driven by populism. Companies will prefer such an environment, according to him.

For bonds, the BOE policy will be more important than the election outcome and Iggo expects a cut in the 5.25% key rate as soon as August — an outcome currently priced around one-in-three by money markets. He forecasts inflation dropped sharply in May, allowing for easing to start soon.

Interest-rate cuts should also boost sentiment toward UK equities, which “punch below their weight” at a global level, according to Iggo. The share of the UK in the FTSE All-World Index was just 4%, compared to 61% for the US, as of September 2023.

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