Welcome to your July monthly market outlook from atomos 

In the UK, as predicted, the Labour party has been elected to government with a large majority. UK financial markets have been relatively stable throughout the election process and the market reaction overnight remained limited.  

In France, the surprise election is about the only thing in common with the UK. Projections for the final election outcome on the 7 July are very uncertain and French financial assets have been very volatile in recent weeks – equity and French government bond prices have both fallen. 

What comes next for the UK? 

We now know that Labour is going to govern with a large majority of at least 168 over the next four to five years. No political surprises here – polls were pointing persistently to this outcome since the snap election was called.  

We also expect macroeconomic and policy uncertainty to be limited over the next one to two years. Labour (along with the Conservatives) has stated clearly they will adopt the UK’s fiscal spending rules. These require the debt-to-GDP ratio to fall within a five-year horizon and the ratio of the annual budget deficit to GDP to be below 3% by the end of the same period. This means there is only limited room for any big policy changes such as tax cuts or spending increases. As a result, the impact of tax or spending policy on UK economic growth, inflation, and interest rates will also be limited. 

Of course, there will be policies that adjust the balance of government spending but, overall, we expect these will be fairly low impact.  

There are also particularly important policies that will reshape structural factors in the UK economy. For example, addressing the UK’s long-term weak productivity growth problem, improving UK seed, scale-up, and larger-cap capital markets, and improving the UK’s trading relationship with the EU. All of these, and others, will be hugely important for future economic growth and wealth creation. However, they are typically long-term, gradual policies which will take time to have an effect. 

This relatively low level of election, policy, and economic uncertainty has meant the impact on UK financial markets of the general election has been relatively muted. 

What’s next for France? 

Election, policy, and economic issues look quite different and much more uncertain in France. The reaction of French financial markets has been different – with much more volatility in asset prices recently. 

As of 8 July, the election results points to a hung parliament. In a surprise result, the leftwing Nouveau Front Populaire (NFP) alliance won 182 seats, Emmanuel Macron’s centrist party Ensemble 163 seats, and Marine Le Pen’s far-right Rassemblement National (RN) was in third place with 143 seats. This means no single alliance will be able to form a majority government. It also may not be possible to form a stable coalition government, which could lead to more elections in the next year.

France has a government annual deficit and overall debt problem, and it is unclear whether an incoming government would seek to lower or even stabilise the country’s high level of debt. A number of previously-stated policies from both RN and NFP would increase government spending and debt. While RN pulled back from some of these commitments as the likelihood of them winning the most seats or a majority grew. While we think it is most likely that government finances will be controlled, the risk of a surprise is high.

How has the French election impacted markets? 

The high vote shares for the RN and NFP, the uncertainty over the outcome, and France’s debt position, have led to a big jump in the volatility of French financial markets. French equities have fallen – especially in the week after Macron called the surprise election. As you might expect, it is the sectors that are most linked to the domestic French economy that have fallen the most. The yield on French government bonds has risen, which reflects the potentially higher credit risk of the government if debt levels were to increase further. French asset prices did recover partially in the week between the first and final rounds of voting, as it became increasingly likely there would be no far-right or leftwing majority and clear policy mandate for these blocs.

It’s also important to note that this financial volatility has largely been limited to French assets – it has not passed through to the markets of other eurozone countries and the impact on the EUR/USD exchange rate has been small. That is to say, markets, so far, see this as primarily a domestic French issue. This is something we will continue to monitor.  

We will also continue to look for any investment opportunities that may arise if French or wider European asset prices are more volatile than their expected macroeconomic, sovereign, and corporate fundamentals. 

Sector in focus: Healthcare 

The healthcare sector within the MSCI World (a global stock index) delivered low double-digit returns over the last 12 months, but still materially underperformed the broader equities universe. This was partly due to weaker earnings growth for the sector in 2023 and 2024 compared to the index as a whole. However, the boom in diabetes and obesity drugs including Wegovy, Ozempic and Mounjaro has helped lift the share prices of the two largest companies in the sector, Eli Lilly and Novo Nordisk. Market consensus is for strong earnings growth from both companies over the next two years as demand for these drugs outstrips supply.  

Meanwhile, some large pharmaceutical companies will face challenges from US drug price negotiations under the Inflation Reduction Act of 2022. Medicare, which covers over 65 million Americans, mostly aged 65 or older, is negotiating prescription drug prices, set to be effective from 2026. The extent of discounts has not yet been finalised but is expected to be anywhere between 25% and 60%, which could affect drug makers’ profit margins. 

Some of the same manufacturers also risk ‘loss of exclusivity’ on some drugs, leading to increased competition from generics. These increased risks to earnings have negatively impacted the performance of these manufacturers.  

Our investment strategy 

We pay attention to what’s happening in the wider environment, political and economic, to assess how it could impact your investments. Overall, our strategy is active investment management and to stay well diversified across a range of assets to minimise any potential risks we see.

If you would like to discuss any of the topics covered in this month’s outlook, our door is always open. Contact us 

Content correct as of publication on 8th July 2024

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

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