Political upheaval is not only a risk to be navigated, but also an opportunity – even if is hard to see it that way right now in the UK.
The narrative of decline is back with force. As Sir Keir Starmer’s future became increasingly tenuous following Labour’s disappointing local election results earlier this month, the usual sequence of events took hold. First came the anxious monitoring of the pound as it suffered its worst week in a year and a half. This was then followed by the obligatory obituaries, with Anthony Seldon picking up the baton recently to suggest the situation is so dire that “Britain risks a state of meltdown”.
We have had pinch-points like this before. Who can forget the heady days of the Truss-induced 2022 gilt crisis? This time, however, there is a sense that a Rubicon has been crossed. What once felt like cyclical pessimism is beginning to look more entrenched, and British companies must now contend with the growing belief that they are operating in a country which is no longer seen to be the gold standard in good governance.
This will cause some unease in the City. There is already deep concern about the future of the public markets amid subdued IPO activity and a succession of take-privates in recent years. Indeed, previous comments made by Andy Burnham that the UK should not be “in hock” to bond markets unnerved investors in November last year; the very real possibility of a Burnham premiership will now raise even deeper questions about how British companies should position themselves moving forward.
Certainly, the US is a useful case study in assuaging some of these concerns and demonstrating how political volatility is, in many ways, subordinate to economic fundamentals. Despite events as existential as the January 6th Capitol attack and as disruptive as the ‘Liberation Day’ tariffs, the US financial markets retain a uniquely powerful position. When Nvidia became the first company to reach a market capitalisation of $5tn last year, its value exceeded the GDP of every country except the US and China.
Whilst political instability may not determine the economic futures of nations outright, it can materially shape financial market sentiment. That dynamic is no clearer anywhere right now than in Hungary. I was in Budapest last month shortly after the election and the sense of relief on the streets was palpable. The ending of Viktor Orbán’s 16-year rule is seen as a genuine fresh start, marked by spontaneous celebrations on metro lines and even dancing by members of the new ruling party.
It remains to be seen whether new Hungarian Prime Minister Péter Magyar will be able to leverage that optimism successfully. In fact, the EU and Hungary are already split on the issue of the release of post-pandemic EU recovery funds but, crucially, there is clear political will from the European Commission to reset relations and talks appear to be moving in the right direction. Investors, too, are observing the positive mood music; Morgan Stanley estimates that the unfreezing of the EU funds alone could add 1-1.5 percentage points to the country’s GDP growth.
It is important to keep all of this in mind when running a company, something that business leaders should remember during the summer months here in the UK, which will undoubtedly contain further surprises within the political sphere. Jamie Dimon has already come out to say that JP Morgan would “reconsider” its project for a multibillion-pound tower in Canary Wharf if the government raised taxes on banks, but much of this is noise. The reality is that political certainties never hold, and companies and equity markets adapt, ultimately identifying opportunities even within the most adverse of external conditions.
If you’d like to discuss what this means in practice or explore these issues further, please get in touch with the Corporate Advisory & Capital Markets team at MHP Group.
