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Prime minister, Rishi Sunak, has had his request to dissolve parliament approved with a general election set for 4th July. Why now, and what does this mean for investors?

Why did Sunak make his move now?

Yesterday’s announcement (22nd May) caught many commentators, and indeed politicians, by surprise. The consensus had been that he would wait until much later in the year to call an election, giving time for the Conservative party to catch up in the opinion polls. An election must be held within five years of the first meeting of parliament, meaning he had up to 17th December to make the call.

While Labour are currently way ahead in the polling – Electoral Calculus predicting they will win by a majority of 308, as at 21st May – Sunak did point to the achievement of two “major milestones” in his Downing Street speech. These were, he claimed, reducing inflation and growing the UK economy at a rate faster than other G7 countries.

It was probably more than a coincidence that the election was called on the day that the Office for National Statistics announced a drop in the Consumer Price Index of inflation (CPI) from 3.2% to 2.3% in the year to April 2024.

This is encouraging news, with inflation having fallen significantly since reaching a peak in this cycle of 11.1% in October 2022, sitting now just above the Bank of England’s 2% target.

On economic growth, an update from the International Monetary Fund released earlier in the week said the UK economy is “approaching a soft landing, with a recovery in growth expected in 2024, strengthening in 2025”.

How markets reacted to the surprise announcement

There has so far been very muted market response. As news broke mid-afternoon on the 22nd May of the announcement, the FTSE 100 had fallen slightly and ended the day down 0.6%. 

However, this is more likely attributed to the earlier inflation announcement, with prior expectations that CPI would fall further than it did. There were no significant moves in the UK government bond market, nor in pound sterling. 

However, the CPI news did cause a slight unwind in expectations for the pace of interest rate cuts - hence the negative initial stock market reaction.

What the Nutmeg investment team will be monitoring in the lead up to 4th July

The Nutmeg team will be keeping close tabs on both the leading parties as they fill in more detail about their election policies and pledges. 

The team expects both the Conservatives and Labour to follow similar economic policy. It’s important to remember that there has been little headway made in attempts to reduce national debt.

In the year to March, the Government borrowed a mammoth £120.7bn. While this was lower than the previous year, it was £6.6bn more than had been predicted.

Whoever wins, they are unlikely to have much fiscal headroom, which means it will be difficult for any party to deliver new tax cuts or major spending programmes.

It’s worth noting that Labour has also promised to set up a new publicly owned British energy company, drawing on renewable sources, though what this would mean in practice – and the consequences for FTSE 100-listed energy giants – is yet to be determined.

As it stands, UK equities have largely had a good year so far in 2024, and the team continues to be overweight risk-assets.

A more in-depth analysis of both UK and US elections, and the historic impact on markets will be posted on our website in the coming days.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.