We get a lot of questions on politics around the time of elections.  In 2024, 40% of the world’s population face an election, including the UK, US and India.  How do we plan for elections and potential change in governments?

A change in UK government?

The last time Labour won a general election without Tony Blair as leader is 1974.  Despite the relative lack in the change of party in government over that period, the UK has changed a lot.  Change usually happens despite the government not because of it.  Dynamism isn’t usually a word associated with government and state-run sectors.

An obvious risk is if a new government has some extreme views and policies.  The opposition party can propose more extreme policies as they aren’t in power and want to appeal to their supporters.  If they get into government, it is far more difficult to enact more extreme policies.  One example was Jeremy Corbyn’s plans to nationalise UK infrastructure in 2017, which led to a 15% or so fall in the share prices of infrastructure companies.  It wasn’t a realistic plan, but it didn’t matter – it was what his supporters wanted to hear.

There are lots of people saying that Labour will easily win the next election.  They might do, however they need a big swing.  They currently have 198 seats and need to win another 120 seats.  What could we expect if we have a Starmer/Reeves government?  One reason why they could win is that it looks like the most Blair/Brown Labour leadership since they left power in 2010 and that means a centrist set of broadly business-friendly policies.  Owen Jones, a left-wing Guardian columnist said Starmer has so-far delivered “Blairism without charisma.”

A change in US government?

The latest polls and betting show that it is currently very close between Biden and Trump.  Trump would be the first President since 1893 to have two non-consecutive terms.  The polls and betting also show that the two expected candidates are unpopular.  In the Reuters poll in early December, 26% said they didn’t know who they will vote for.  In the 2016 election, Hilary Clinton was unpopular and that led the Libertarian party to win over 3% of the vote (in most elections, the other parties get about 1% of the vote), which some claim is the reason Hilary lost.  In the 1992 election, Ross Perot won 18% of the popular vote as an independent.  Could there be space for a third party/person to mix up US politics?

Well, there is a well-known person who is standing as an independent in next year’s election; Robert F Kennedy Jr.  He is Bobby Kennedy’s son and nephew of JFK.  He is outspoken and has the name and finances to cause issues for Biden & Trump (RFK is 20/1 currently to be President).  Despite Trump’s patchy record as President, markets and the economy continued to perform well and if he won again, can see the US doing well despite the President.

One cohesive party?

One reason why it is increasingly difficult for incumbent governments to get anything done is the factions, in-fighting and different ideology within their own party.  We’ve seen it recently with Sunak’s Rwanda plan that there are at least five groups within the Tory party that have different views on how the party should be governed and are willing to vote against the whip, including the European Research Group, the New Conservatives, the Northern Research Group, the Common Sense Group, the Conservative Growth Group, it goes on…

This isn’t just an issue in the Tory party or the UK.  In November we saw a Republican, Matt Gaetz, work with Democrats to remove the Republican House Speaker, Kevin McCarthy.  It then took four separate nominations before Mike Johnson was finally appointed.  The Republicans have recently been split by a pro/anti-Trump stance, however there are other factions such as the Tea Party Movement and the Freedom Caucus who believe that the Republican party (such as Kevin McCarthy) isn’t ring-wing enough.  All of this makes policy making messy and difficult to achieve, even within your own party.

Are there particular UK policies that Labour would target?

As mentioned, it is currently unlikely that Labour will bring any extreme policies.  Their current ‘five bold missions’ are what you would expect to see, including building more homes, a focus on the NHS and crime.  There is always a lot of talk around tax with Labour governments and the detail around their potential tax plans is thin on the ground.  There are some areas they have already confirmed that they will focus on, such as tax on non-domiciled people, private equity, private schools and replace business rates.  They’ve also confirmed they would not consider a wealth tax.  Other relatively easy things they could do would be to move capital gains tax to be in-line with income tax.

The current government made significant changes to pensions in March, including the abolishment of the lifetime allowance and increased the annual allowance.  Could Labour reverse these?  They immediately announced that they would.  However, recent analysis from former Pensions Minister, Sir Steve Webb, highlighted how practically difficult it would be to achieve; “whilst reinstating the LTA may be attractive from the perspective of political messaging, the practicalities and risks associated with doing so would appear to be dauting.”  If they do, they will have to include some transitional protection.

Another old favourite is the potential to remove the 25% tax-free cash pension allowance.  It has been discussed at every election since we’ve been in the industry and no-doubt it will be spoken about again next year, however we still can’t see it happening.

This is likely to be Labour’s biggest opportunity for some time to get back into power and they won’t want to upset the floating, undecided voters who by recent polls is around 15% of the electorate at present.

How do markets perform in elections?

Pretty well is the short answer.  In the run-up to elections, the incumbent party usually try and give away benefits and tax cuts to sweeten up voters.  After elections, markets have historically performed well too.  In the 19 US election years since World War II, all but two of those years have produced positive returns.  The best 3-month returns following a US election has come with a Democrat President but Republican controlled or divided Congress.

So what are we doing?

From an investment perspective, there are bigger drivers in markets than elections and at present, nothing from a political perspective is making us change portfolio allocations.  As was mentioned at the start, economies, companies, and consumers are dynamic despite the government not because of it.  From a financial planning perspective, we will monitor manifestos and see what both Labour and Conservatives come out with over the next year.  If there are potential policies that change or complicate future plans, we will be in touch.