UK election campaigning is in full swing – everyone has a plan and promises certainty. Markets are staying calm as the outcome is clear according to the polls. So could anything unsettle markets at this stage? 

 

The 2022 gilts sell-off has burnt itself into the memories of pension trustees. It was prompted by Liz Truss’ government announcing that it would cut taxes to the tune of £45bn, without producing an assessment from the Office for Budget Responsibility on the impact this would have. The market reaction followed on the heel, with disastrous consequences for some schemes and, in the end, positive ones for others, particularly those that were not fully hedged.

 

Rishi Sunak outlined tax cuts in the Tory manifesto on Tuesday, coupled with new spending commitments, but as markets are not expecting a Conservative government after 4 July, they have been undisturbed.

 

The UK election is just one of many global events, so the impact on capital markets tends to be muted, says Danielle Markham, head of LDI research at consultancy Barnett Waddingham. With UK election polls being closely tracked and predicted outcomes priced in over time, any reaction would only happen if expectations were to be proven wrong. 

 

“There doesn’t seem to have been an unusual movement in gilt yields in the immediate aftermath of the Conservative manifesto being unveiled, which isn't a surprise given both the content of the manifesto and since they are lagging in the polls,” says Markham. 

 

Something that could cause ripples in gilt markets would be, for example, big surprises in Labour’s manifesto, she adds. What happens after the election matters, too.

 

“We’d expect much of the impact on markets to emerge further down the line, when policy changes come to being implemented,” she says. 

 

However, the UK is globally connected and US markets in particular influence what happens in the UK. The US is due to have elections in November, so it will be important to watch how the political backdrop and party manifestos develop on the other side of the Atlantic, she believes. 

  

“In the event there are surprises, either announced in manifestos, election results or policy implementation, there could be increased volatility in gilts markets,” she believes.  

 

In the aftermath of the gilts panic, new rules requiring bigger capital buffers for LDI investors were introduced, making them less vulnerable to big gilt yield swings, but investors might want to assure themselves their fund is able to withstand volatility. 

 

“We’d encourage all LDI investors to ensure they are set up to avoid any potential gilt market volatility being an issue, whether there is an election looming or otherwise,” says Markham. 

So far, the extra buffers have not had to be drawn on, including following the latest manifestos. James Chalk, a professional trustee at Vidett, is not surprised given the Conservatives are expected to be replaced in Downing Street.  

 

“From what I’ve seen and read, industry and markets are getting ready for a Labour government, and the Starmer regime is seen as politically centre and pro-business,” he says.