Strategy blog: UK - New government

After the last two days it is not a big surprise that the UK is to have a new Prime Minister, and even if it were, it is not clear in which direction UK asset prices should be headed. UK-based investors should not rush to rearrange their portfolios on this account. (For other investors, UK assets will be only a small part of portfolios anyway, and this note will be a bit parochial.)

There might be two broad ideas in play initially. The first is a woolly one: a new government might somehow boost the all-round credibility of the economy and its currency. A perceived gain in creditworthiness might boost gilt prices – though if business and consumer confidence were to rise, growth might be stronger, pushing yields up not down.

These feel like marginal considerations, and of course the interim uncertainty could be bad for credibility and the currency (I confess I didn't initially consider this, taking it for granted that UK credibility could only improve).

The second is more specific: the next occupant of No 10 may be less minded to borrow to boost the economy. This could boost gilt prices, but to the extent that it leads to less growth – and to lower Bank of England interest rates than would otherwise be the case – it might undermine the pound.

This feels like a more practical channel, but is still hardly a game-changer.

Medium-term, the picture is blurred further by an approaching general election, scheduled for 2024 (though it could be held earlier), and by the opposition parties' yet-to-be-decided positioning ahead of it.

As is often the case in macroeconomics, then, there are many moving parts to consider.

But as a rule of thumb, the business cycle – growth and inflation trends – usually matters more to portfolios than the occupant of No 10 or even the party of government. And the biggest holdings of most multi-asset portfolios are stocks, not bonds, which are driven more by the global business cycle than by the domestic one anyway, and which benefit more from a weak pound than a strong one (though currency volatility is usually a small component of the overall return on stocks).

As often, we advise sitting tight and watching carefully.

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