- The initial market reaction to the latest UK political news has been relatively calm, with UK equities, government bonds, and sterling largely unmoved
- Political change can feel unsettling, but history indicates that investor attention tends quickly refocus on economic growth, inflation, and earnings
- We continue to monitor near-term developments, but our investment approach remains grounded in long-term fundamentals and economic analysis
Following a period of speculation, Prime Minister Keir Starmer has announced his resignation.
Starmer intends to remain as prime minister until a new Labour leader is chosen. Nominations open on 9 July, with a new prime minister likely to be in place by September at the latest. Andy Burnham, MP and former Metropolitan Mayor of Manchester, is currently widely accepted as the favourite to secure the role.
In this short update, we review the immediate market response and place it in the context of our established investment views and positioning.
What’s happening in markets?
Investors appear to have taken the news of the prime minister’s resignation relatively calmly.
As we write, UK equity markets are not demonstrating any meaningful volatility, UK government bond yields remain largely unchanged, and the value of sterling is fairly steady.
The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.
Retaining perspective
The policy intentions of the incoming leader are likely to create some uncertainty over the coming months. However, the next UK prime minister will face many of the same economic challenges faced by Starmer, and the fundamentals remain the same, which will continue to shape the options open to any government spending policies. These challenges include stubbornly above-target inflation, limited economic growth, and elevated government debt levels (albeit not out of line with G7 peers).
In more welcome news for an incoming leader, last week’s US-Iran deal has reduced the risk of further energy inflation over the coming quarters, thereby reducing the likelihood and magnitude of Bank of England hikes this year as well as the need for a financial response from the government. Signals from bond markets indicate that markets currently expect one UK rate hike over the next 12 months, which we view as appropriate given softer economic growth, inflation dynamics, and political change.
Unless political outcomes translate into clear and sustained changes in economic policy, initial market reactions to political change typically fade. Instead, investors tend to refocus their attention on medium‑term drivers of performance such as economic growth, inflation, and corporate earnings.
We’ll be monitoring investor sentiment as more news emerges over the coming days. Should volatility occur, it will be important to remember that this is a normal feature of investing, and usually reflects markets adjusting to new information rather than signalling a fundamental shift in the investment landscape.
How our portfolios are positioned
While the health and success of the UK economy remain important, their impact on our investment holdings is relatively limited. We maintain a global investment perspective and currently hold a neutral stance on UK equities.
We recently slightly increased our positions in global government bonds, including UK gilts, though we remain underweight bonds versus global equities. We see this as a ‘higher for longer’ environment for government bond yields, and would expect this to continue under a new UK leader.
Since January 2025, we have maintained a modest overweight position in sterling. Given sterling’s significant valuation discount relative to the US dollar, we remain comfortable with this stance.
How we’re responding
Periods of market volatility, whatever their triggers, are an inherent part of investing, and our portfolios are designed with this in mind. Our positioning is guided by underlying economic conditions and fundamentals, rather than short-term political developments.
At present, we are closely monitoring how markets are responding, rather than making immediate adjustments. As always, our focus remains on any potential implications for the broader outlook across economic growth, inflation, and policy. For now, our core investment views and positioning remain unchanged.
