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New Government will be ‘highly constrained’ due to ‘high levels of debt’ – London Business News | Londonlovesbusiness.com

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Economists have warned the financial markets will not receive a boost if Labour wins the General Election, because the UK has no room left to play to help stimulate the economy.

Rishi Sunak’s decision to go to the polls on July 4 has hardly registered with investors, even though markets are notoriously scared of uncertainty about the political stance of a government.

But analysts at investment experts Saxo say the soaring levels of government debt, coupled with both Labour and Conservatives vowing to reduce it against GDP, mean no matter which party triumphs nothing will change in the economy.

Instead, they say the most significant factor they are focusing on is the high number of UK companies being picked off by overseas predators looking to complete mergers and acquisitions.

Dan Squires, Head of UK Sales at Saxo, said: “The General election and a possible change of Government means very little for markets or the economy – simply because whoever wins is highly constrained in what they can do.

“This is largely due to high levels of government debt, with both main parties having committed to reduce Debt to GDP – which leaves very little wriggle room for tax cuts or anything radical.

“Whilst inflation data this week was good news in the sense that it showed inflation falling again, the absolute decline was less than the market expected, and this is why consensus now thinks the first Band of England rate cuts will not happen until August. Obviously the BoE is independent, but rather like the government, their options are relatively limited at this stage – perhaps a 25bp rate cut in August.

“UK economic growth, whilst still very low in absolute terms, has surprised on the upside and is a clear positive for domestically sensitive UK companies (esp the FTSE250). However, far more important for UK equity markets is the dramatic level of Mergers and Acquisitions we are seeing.

“The FTSE100 has outperformed the S&P500 over the last 3 years; but UK equities still seem to offer a lot of value – and this is acting as a catalyst for high levels of M&A. At the moment we are seeing 1 bid per day. Hargreaves Lansdown is just the latest UK company to be approached at a significant premium.

“Global investors have been underweight the UK for years, and we have seen many consecutive months of outflows – which may now be reversing. UK equities are just 4% of the MSCI world – which is an all time low %. So, almost regardless of the general election, at Saxo we are of the view that there is a sentiment shift happening and the UK market is back in focus.

The latest Bank of America global fund managers’ survey showed investors increased their exposure to UK stocks by 3 percentage points this month. Whilst Saxo UK clients are still heavily invested in US tech stocks, a FTSE100 tracker (ETF) is our clients 4th biggest holding by value.”

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