Uncertainty about who will win and what policies will result always makes investors wary.
Although it is almost certain that the British government will switch from the Conservatives to Labour, we would be surprised to see any reluctance in the run-up to the general election. With a 20% lead in the polls, there is plenty of time to understand this result and very little uncertainty on this subject. When it comes to the economy, there are also very few differences between the two parties’ policies. Labor says it will continue to stick to the government’s existing “fiscal rules”, which require the debt-to-GDP ratio to be reduced over the next five years. If not in the firing line themselves, Labor politicians have watched the shock and awe inflicted on Liz Truss by the bond market during her mini-budget crisis. They are in no mood to provoke the ire of bond vigilantes by proposing policies considered imprudent The evolution of inflation in the United Kingdom, and therefore the timetable for the first rate cut by the Bank of England remain uncertain, yet the fact that British politicians have engraved this lesson in budgetary discipline in their memory makes us confident in bond investments in the United Kingdom. Eliminating the risk of incompetence and market indifference makes UK corporate bonds relatively attractive compared to others.
While markets eased slightly after Marine Le Pen announced she would work with Emmanuel Macron, it is clear that tolerance for weak public finances is low. Uncertainty about who will win and what policies will result always makes investors wary. The further the winning coalition moves from the center – whether left or right – the more investors worry about fiscal orthodoxy. While a full-blown debt crisis is likely to be avoided, investors must factor in the costs of a political deadlock that would hamper France’s ability to respond to external crises and coordinate with the EU. The ECB cannot be seen as a response to a domestic political crisis and investors cannot count on central bank intervention. A parallel could be drawn with the way neighboring countries were supported in 2009, but the difference lies in the longer time scale of these problems, and the complacency of Central Europe which ignored their accumulation, easily postponing blame it on global growth conditions. However, these arguments are no longer valid today. These problems do not make Europe an unattractive destination for bond investments, but they force us to focus on quality companies. Investors should position their portfolios in companies that are robust and benefit from solid market access.
