We hope you’re all extremely well and are enjoying both the surge in temperature and in sporting spectacles, be it Wimbledon, Formula One or the T20 Cricket. Of course, I suspect many of us will have also been watching the football, but I know it would be a stretch to suggest one might have ‘enjoyed’ such viewing. Let’s hope the win breeds some confidence and some more freedom to England’s play – good luck!

Turning to stocks and we also saw some ‘mixed performance’ in June as US shares resumed their position of global leadership whilst European bourses, rocked by political uncertainty, fell away. On balance, the 2nd quarter was a positive one for mainstream developed equity markets, compounding gains enjoyed in the first quarter and completing a rewarding first half. Asian stocks also posted eye catching gains across June, rounding out an impressive quarter for the oft maligned asset class.

Spiking European anxieties centre on the shock announcement of French Parliamentary elections, which will conclude in early July. Marine Le Pen’s party, Rassemblement National (RN or National Rally), are anticipated to do very well in the elections, potentially even winning the most seats in the assembly. The increasing popularity of RN does not, however, give rise to fears of ‘Frexit’, a policy Le Pen abandoned in 2017, but does, instead, provoke concerns of fiscal profligacy; not least given the troubling condition of French public finances.

RN’s policy priorities, other than tackling immigration more vociferously, include tax cuts and reversing many of Macron’s economic reforms, such as returning the state pension age back to 62 from 64. Such fiscal largesse has the ‘bond vigilantes’ on high alert, threatening a French iteration of the Truss budgetary crisis. We would argue, however such concerns appear a little stretched. As history informs, election forecasting is a dangerous game, however, polling suggests whilst an RN ‘plurality’ is possible, a ‘majority’ should not be the base case. In such a ‘Hung Parliament’ it will be hard for RN to deliver on their policy agenda, particularly if left leaning parties can forge a working coalition.

Even if RN secure a majority, however, there are several reasons to hope market turmoil may prove fleeting. Primarily, with President Macron remaining President, the electoral state of ‘cohabitation’ would require compromise in order to drive policy through. RN may, of course, choose a hard line in such a relationship, however, should markets balk at their policy agenda, then a moderation would seem the optimum next step. Not only would such a pivot ease market concerns, but such maturity in approach could be reassuring to the undecided voter, serving to enhance (rather than combust) Le Pen’s chances of winning the Presidential Elections in 2027.

Such a benign election view should not discount the probability we are wrong on this issue, however! RN could yet secure a majority and may prove more militant in their policy priorities. In such a setting it would be hard to envisage anything other than weakness for most French assets, at least in the short-term.

Domestically we have the electoral result, with the General Election having taken place on July 4th. Again, without attempting to appear too cavalier, polls were proved to be correct in pointing to an emphatic Labour victory. Though a deeply personal and emotive subject, investors are seemingly quite relaxed about such an outcome.

Though a number of questions remain unanswered, Labour’s campaign has sought to reassure the electorate they will be a steady hand on the economy, reaffirming both their ‘business friendly’ credentials and their respect for public finances. Closer ties to Europe should also prove an economic fillip, though again we understand the price of such arrangements ‘may’ frustrate some quarters from a political perspective.

Pivoting to stock market fundamentals, and focusing on the globe’s dominant economy, we observe leading US jobs data, such as a fading hiring rates and falling quits rates, point to cracks appearing in the labour market and a further slowing in wage gains. Absent accelerating wage inflation, it is less probable for an inflationary spiral to take hold and for interest rate hikes to be required. It is hard to take such a benign view in the UK given stickier wage inflation, however, a generally weaker economic growth environment creates a high bar for a resumption of interest rate hikes. The core view, therefore, is the disinflationary trends in the US can persist and, in so doing, reinstate a (modestly) dovish path for policy, and encourage investors to offer further support to capital markets.

The combination of lower inflation, more accommodative policy and resilient growth has been described as a ‘Goldilocks’ scenario. This analogy refers to an economy which is neither too hot (where inflation and monetary policy are on the rise – setting the economy up for a fall) or too cold (in recession). A ‘Goldilocks’ outcome has often been a favourable backdrop for equities as it points to more durable economic strength. This relationship may not unfold this time; however, it is a driving force behind a positive equity bias.

Markets have also enjoyed tailwinds from some sensational first quarter earnings performance (released in the second quarter), particularly from companies operating within the dominant, loosely defined ‘AI theme’. This performance, once again, highlights the market’s inability to appreciate how quickly such innovative companies can grow their revenues, showcasing the dangers of relying too heavily upon shorter-term valuation metrics.

Investment life is not all about the US, however. Given the geopolitical troubles which prevail, the relative hedge UK markets provide against a surging oil price provides helpful portfolio diversification, though this is not the sole reason for an increased allocation. UK equity market valuation remains highly compelling versus global competitors, which is further bolstered by the strength of collective balance sheets, high level of dividend yield and, increasingly, higher volume of company buybacks. Prospects for better economic performance (versus some very downbeat expectations) look enticing too, as real incomes creep higher as resilient wages overcome persistent but fading inflationary prints.

As mentioned earlier in the note, Asian equities performed better in June. As we’ve also highlighted in prior months, sentiment toward the asset class will likely prove choppy, as levels of Chinese stimulus falls shy of what markets are hoping for, particularly given the scale of its housing market travails. Given how downbeat sentiment is toward the region, however, it may only take an amelioration in the economic backdrop to reignite investor interest, which is potentially what we’ve seen in June.

Reflecting upon bond markets and a resumption of disinflationary trends, catalysed by weakening (though not collapsing) labour markets, should offer a return to form for the asset class. Indeed, investors should be mindful the disinflationary forces may yet gather pace as the ‘long and variable lags’ of interest rate policy further impact the economy.

Kind regards,

iPensions Wealth Team

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