What a Change in Regime Can Mean for the UK Equities Market
Fourteen years ago, the Conservative party in the UK took office with David Cameron at the helm. In days, the 2024 general election will be held, where for the first time in more than a decade, a Labour candidate is expected to take up that mantle. The last eight years have been turbulent and despite the staying power of the Tories, creeping social and economic problems might prompt a change in leadership. For traders and economists, what's at stake here is the domestic equities market and how it can react to this shift in power.
Post-Brexit UK
The years following the 2016 referendum on the UK's place in the European Union were marred with complications and friction. The people of the United Kingdom of Great Britain and Northern Ireland decided with a majority of 51.9% that their country should depart from the EU.
This decision was difficult. Both of the major political forces to occupy parliament for the past hundred years were against this decision. The Conservatives, led by David Cameron, and Labour, spearheaded by Jeremy Corbyn, either opposed this decision or did not take a hard stance on it.
There was only one party that emerged with the platform of severing Britain's connection to the EU. They succeeded. The years that followed were less rosy, as is always the case in the wake of a major political shift. It took Theresa May, the heir to the Conservative throne, years to push for the execution of this detachment.
Finally, Brexit was finalized under Boris Johnson's oversight as PM. The fallout of this decision was felt in nearly every aspect of society in the years that followed. Although the same Conservative party has been in charge of parliament for the past fourteen years, internal conflicts and outside events have destabilized their platform.
Adding insult to injury, the Covid-19 pandemic put a massive strain on the UK economy, which was exacerbated by the post-Brexit economic slowdown. Currently, the top issues the country is facing are healthcare, the economy and immigration, according to an Ipsos poll.
This can be explained by the UK cutting free travel between it and Europe, limiting the number of people who can pass into the country and thus find gainful employment there. The healthcare and other industries are suffering from staff shortages consequently. In parallel, increased refugee inflows have caused the Conservatives to impose controversial measures such as sending off illegal immigrants to Rwanda, which has understandably sparked heated exchanges.
The State Of The British Economy
With the dissolution of the trade agreements between the UK and the EU, trade volumes declined marginally - from about a negative 10 billion pounds sterling to around 15 billion most recently in 2023 and 2024. This is generally a precursor to slowing growth, as expressed by the Gross Domestic Product, which had been in a state of gradual decline since 2014 even recently going negative in March.
The Bank of England managed to tame inflation, most recently getting it down to a stable 2%, which signals a cooling economy after its spike just two years before. The BoE has still not touched the interest rates after starting the gradual hike back in December of 2021. This begs the question of how the equities are doing.
The barometer of any free-market capitalism is the private sector, which in the case of the UK tends to be benchmarked by the Financial Times Stock Exchange 100 index, or FTSE for short. It includes the hundred largest corporations in the country, which tend to lean more towards the financial, pharmaceutical and energy sectors.
While the growth of the FTSE takes off almost immediately after the first interest rate decrease by the Bank of England, it hardly budged after the first rate increase a year and a half later, signaling a robust cash-flush private sector which continues to grow in spite of higher borrowing costs. 
The Shifting Tides
In politics, Conservatives have been slowly losing their popularity with voters – only 20% say they would vote blue on the next election while 41% would go to their rivals – the Labour party – according to Ipsos. They haven't been in power since 2010 but disgruntled Britons show signs of pivoting in that direction for the next general election on the 4th of July.
Conservatives, at heart, uphold the idea of the free-market capitalism. They believe in financial prosperity coming from minimal government intervention in the workings of the private sector. They also tend to support deregulation and keeping taxation low, especially for enterprises. The combination of these ideas creates a hospitable climate for the private sector, which benefits from low or inexistent trade barriers and from a low corporate tax rate. This leaves more money in the hands of corporations, which generally allows them to spend more on growth and their own shareholders, both of which are key elements of the equities market and its health.
The Labour party represents the opposite side of the political spectrum, and more concretely in terms of economic policy. They lean left, which is a position typically associated with increased spending in and support of the public sector. This includes funneling more into social security policies, education and healthcare. They also put a premium on programs which disrupt current markets and put unwelcome pressure on large segments of UK's economy such as renewable energy initiatives.
As it stands, the UK economy is recovering – inflation is low, the high interest rates have propped up government bond yields and the stock market is up. A Labour government can potentially halt this upward momentum. Labour-supported sectors of the economy are more defensive, meaning they don't grow as much as the cyclical ones supported by Conservatives.
Labour's agenda is to target the sore areas of British life which coincidentally are more socio-political than economic. This might detract resources from and create complications for the private sector in the form of increased taxation and stricter regulation. The 4th of July will surely cause volatility on the market, but more importantly, it might launch the UK equities in a different direction altogether. Labour, if victorious, would have to perform the balancing act of living up to their socially focused platform while retaining the biggest rally in their long-underestimated stock market.
Technical Analysis Of The FTSE 100
Technical Key Levels:
- £8,302: 4-Hour Key Level. This is the first resistance level forming after the drop from the recent all-time high level.
- £7,897 & £6,809: Monthly Key Levels. These represent significant levels on the monthly chart that can act as support.
- £7,685 & £7,304: Daily Key Levels. Continuous price activity around these levels on the daily chart solidifies them as possible support levels.
Chart Patterns:
- Upward Trend Channel: The FTSE 100 is currently respecting an upward trend channel, indicating bullish sentiment.
- Bullish Continuation Pattern: Bullish pennant forming on smaller timeframes, suggesting potential upside continuation in the coming days.
Relative Strength Index (RSI) Analysis:
- Around the time the FTSE 100 reached its new all-time high, the RSI was over the 70 level. This is considered 'overbought' territory and it signaled rapid buying pressure, which could potentially be followed by a reversal.
- Currently, the RSI is hovering just above the middle of the range, above the 50 mark, which shows neither strong buying nor selling pressure, showing that investors are cautiously assessing the situation.
Election Dates:
- Vertical Blue Line: Marks the date of the upcoming UK general election on the 4th of July. Increased volatility is expected on that day.