Yahoo Finance UK ETFs in Focus on Election Impact
The U.K. is heading for a General Election on July 4, and history may indicate a neutral to positive stock market reaction if the Labour Party ousts the Conservatives, per analysts, as quoted on CNBC. iShares MSCI United Kingdom Small-Cap ETF EWUS has gained 9.3% past month (as of May 28, 2024), the highest performer among the UK ETFs. Election activities and improving economic activities probably boosted this domestically focused fund.
Let’s delve a little deeper.
Stock Market Expectations
Analysts anticipate a positive reaction from stock markets if the center-left Labour Party wins the UK General Election, with historical trends suggesting that UK stocks tend to perform better following Labour victories compared to Conservative wins.
Leaders of the Labour Party, including Shadow Finance Minister Rachel Reeves and party leader Keir Starmer, are determined to engage in fiscal discipline to lower the country’s debt. Along with business leaders, they aim to steer the economy with more confidence.
Historical Stock Performance
According to Citi's analysis, the MSCI UK index of large- to mid-cap stocks has delivered a 6% gain on average six months after Labour victories and a 5% fall following Conservative wins since 1979. The FTSE 250 has generally outperformed the FTSE 100 after elections, with stronger outperformance seen following Labour victories, a CNBC article revealed.
Defensive stocks and financials typically perform better after elections, with energy stocks performing well irrespective of the election outcome. Investors should note thatFirst Trust United Kingdom AlphaDEX Fund FXU, which does not invest more than 3% on any stock, andiShares MSCI United Kingdom ETF EWU, which has high company-specific concentration risks, have returned respectively 6.9% and 6.4% past month. The fund EWU’s top-10 holdings section has about 12% exposure to the energy sector.
Past Labour Government Performance
Under the past Labour governments, the UK stock market has faltered on five occasions, but this cannot solely be attributed to the party. Historical events such as the Great Depression, post-war periods, oil market shocks, and financial crises played significant roles, indicating that such falls are event-driven, not election-driven.
Current Market Perception
Despite historical trends, some analysts, like John Higgins of Capital Economics, believe that the return of the Labour Party to power would not significantly impact investors this time around, given the broader economic context since 2010, as quoted on CNBC. After all, the current situation of the global economy depends largely on the interest rate policy, the Fed’s decision, geopolitical crises, the transition in the energy market and the AI boom
UK Economic Situation
UK’s economic growth in Q1 of 2024 was 0.6% and surveys have indicated that the improvement will continue into the second quarter. Both business and consumer confidence have received positive momentum. Notably, the UK economy fell into a technical recession in the second half of 2023, which marked two successive quarters of negative growth in the real GDP.
Inflation in the UK has fallen from a high of 11.1% in October 2022 to 2.3%, only just above its target. Consumer prices were down sharply in April from a 3.2% increase in March and the lowest since July 2021, when it was at 2.0%. But April’s figure missed economists’ (polled by Reuters) expectation of a 2.1% increase. The Bank of England’s inflation target is 2%.
Having said that, we would like to note that the Bank of England is likely to be cautious about cutting interest rates as service sector inflation is still high at 5.9%. Inflation did not fall as sharply as expected in April. The UK economy is approaching a soft landing, with 2024 likely to see a recovery in growth and 2025 expected to see further strengthening, IMF said.
Sterling Outlook
Analysts predict that the outlook for sterling and UK government bonds will remain connected 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 United Kingdom ETF (EWU): ETF Research Reports
iShares MSCI United Kingdom Small-Cap ETF (EWUS): ETF Research Reports
First Trust Utilities AlphaDEX ETF (FXU): ETF Research Reports
