The landslide win for Labour with a working majority of 172 is set to enhance the attractiveness of the UK given the prospect of a period of political stability, particularly when compared to countries like France and potentially the US.

There is a growing belief amongst analysts that Sir Keir Starmer will draw a line under the tumultuous period under the Conservatives and enhance the appeal of UK assets.  With Labour’s huge majority it may prove that the UK is seen as somewhat of a safe haven which will provide much needed business confidence and optimism, particularly compared with France where the shock and relief is just setting in with the far right beaten into third place.  However, this has left the French with a hung parliament, potentially leaving it in a state of paralysis.

Labour does have an uphill battle to deliver on its pledges with tight borrowing constraints and weak growth forecasts of only 0.5% this year.  There is the potential of closer working ties with the European Union which may marginally improve the UK’s growth prospects.

Moving away from the election results, ongoing investor optimism about the economic outlook supported risk assets, with developed market stocks delivering returns of 4.5% over the month.  Global bonds also generated positive performance of 1.3%, with markets still anticipating rate cuts this summer albeit with some divergence in the timing between the US and Europe.

Expectations of falling interest rates favoured Growth sectors (predominantly IT), which outperformed Value sectors by 2.4 percentage points.  Small cap stocks regained some momentum, generating returns of 4.6%, broadly in line with large cap peers.

After peaking in April, oil prices retreated during May.  However, broader commodity indices still delivered positive returns of 1.8%, with global demand remaining solid and ongoing conflicts in both the Middle East and Ukraine.

European economic activity is improving with the services sectors continuing to act as the key pillar of strength, while there were also signs of a recovery in manufacturing.  First quarter GDP was confirmed at 0.3% quarter-over-quarter, and corporate profits surprised on the upside.  European equities excluding the UK returned 3.6% while UK equities returned 2.4%.

While the US economy remains in solid shape, data released in May pointed to some signs of moderation, with capital spending and home sales both trending sideways.  After falling in April, US equities rebounded with monthly returns of 5.0% in May, supported by better-than-expected first quarter earnings results across a number of sectors.

UK headline inflation fell in May to 2%, however, whilst services inflation has fallen from 5.9% in April, it remains high at 5.7%, despite this, there is a strong possibility the Bank of England will reduce the interest rate by 0.25% in September.

In aggregate, economic data released in June tempered concerns of overheating in the US economy and showed signs of a rebalancing in economic momentum.  Corporate fundamentals remain in good health, and the next move for interest rates in the West is still likely to be lower, even if there is some divergence in timing across regions.  While these factors should be supportive of risk asset valuations, the hunt for positive growth momentum and attractive valuations is starting to shift investors’ focus away from the US and towards more regionally diversified exposure, where the scope for catch up appears greater.  

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