By Frédérique Carrier, Head of Investment Strategy for RBC Wealth Management in the British Isles and Asia
United Kingdom
With the Labour Party continuing to command a considerable lead in the polls, it seems very likely to lead the new government, in our opinion. A Labour government would try to stimulate growth through making it easier to acquire permits to build new homes and commercial buildings, and resetting relations with the EU, still its largest trading partner. Labour has also promised to expand the scope of responsibility of the British Business Bank, which invests in small and medium enterprises, and to look to nationalize the rail industry.
Labour’s proposed budget looks to increase investment in green industries, as well as health care, schools, and childcare. While the Conservative government had been actively outsourcing services, Labour would take back control of several activities to lower the bill paid to consultants.
To fund its policies, Labour promises to close tax loopholes and increase a number of specific taxes, such as the energy profits levy. It has committed to keep the corporate tax rate at 25% for the duration of Parliament and to maintain the income tax top rate and capital gains tax.
The new government will likely find that its policies will be restricted by the weak national finances, with the fiscal deficit exceeding 4% of GDP and government debt just above 100%.
We believe the unique composition of the UK equity market, including its high weighting to commodities and defensive sectors, means UK equities at the index level will remain inextricably linked to either the “value” factor outperforming “growth” or defensives outperforming cyclicals, or both.
Within the UK equity market, we believe high-quality large-cap stocks that are well-placed to benefit from structural (long-term) growth tailwinds while trading on reasonable valuations, often at a discount to their global peers listed overseas, remain an attractive area of opportunity. We also see selective opportunities in domestically focused UK stocks, where, encouragingly, the economic backdrop appears to be improving. In our view, the low valuation of UK equities means that takeover interest in UK companies from international competitors and private equity is likely to remain elevated.
Continental Europe
In the short term, attention will likely focus on EU politics and the fallout from the June European parliamentary elections and the July French legislative elections.
We do not anticipate a reversal of European policies despite the advance of far-right parties, as the centre retained more than 55% of the votes. However, the green parties’ poor showing will likely delay the implementation of the bloc’s climate agenda.
At the time of writing, it is unclear whether French President Emmanuel Macron’s strategy to call a legislative election will pay off. In doing so, he hopes his party may be able to redress its marked loss to the far-right National Rally (Rassemblement National or RN) party.
Markets worry that the RN’s expansive fiscal policy at a time when the country’s fiscal deficit exceeds 5% could destabilise the region, much like Greece did in 2012. This would be problematic as France is the second-largest economy in the eurozone. Ultimately, we believe that if the RN becomes part of the government, it would likely align itself with Brussels’ fiscal policies. It would not be in the RN’s best interest to upset the apple cart ahead of the French presidential elections in 2027, in our view.
Meanwhile, the recovery in the euro area is taking place. Inflation is waning, and the European Central Bank (ECB) is cutting rates, which should underpin domestic demand.
The MSCI Europe ex UK Index reached a 12-month high in June 2024. The uncertainty of the French legislative elections ushers in a period of volatility. We maintain our Market Weight position and balanced approach, seeking exposure to high-quality European stocks, especially in the Technology, Industrials, and Health Care sectors alongside selective opportunities which can benefit from the improving macro backdrop and relatively inexpensive valuations available today. Should a deteriorating political situation lead to near-term moves appearing overdone, we would seek to add to positions.
