Not a Normal summer

Summer in the Northern hemisphere is normally a pretty quiet affair - a time for relaxing, reading and recharging batteries.

Hence the investment strategy of “Sell in May and go away”. I thought that this was an outdated theme, but relatively recent academic studies do show that stock market returns are meaningfully stronger in the November to May period than in the May to October period (eg Andrade, Chhaochharia and Fuerst, 2012).

The summer of 2024, however, has been anything but quiet.

There have been momentous happenings in the political, conflict, social, economic and regulatory spheres.

In this article I look at some of these and presume to draw together a few “takeaways”.

The UK

Change of Government

To the surprise of nearly everyone (including most of his Cabinet) Rishi Sunak took to a rain-soaked Downing Street, sans umbrella, on 23 May to call a General Election for 4 July.

Nothing much went right with the Tory campaign, from Nigel Farage deciding that he would return as leader of Reform UK and contest Clacton, to Rishi leaving the D-Day celebrations early, to the revelation that Tory insiders had placed bets on an early election.

Meanwhile the Labour Party had not been taken by surprise and launched an orderly campaign focussing on six missions, Nigel Farage “threw himself full pelt into the contest” (per Politico) and Ed Davey of the LibDems ran against presumed type to embark upon a series of crowd-pleasing jolly japes and a smartly tactical campaign.

The result of course was a commanding Labour majority of 174 seats. The Tories managed only 121 seats, while the LibDems gained 61 seats to take 72 in all, Reform won 5 seats, including Farage in Clacton, and the Scottish Nationalists won 9 seats, down from 48 in 2019.

By any standards this was a massive reshaping of the Westminster map.

The oddities in the first past the post system are writ large in the results. Labour won 33.7% of the popular vote, which translated into 412 seats (out of a possible 650), the LibDems’ 12.2% was worth 72 seats whilst Reform’s 14.3% produced 5 seats. Nigel Farage will inevitably be noisy in his pursuit of proportional representation reform over this Parliament. Whatever one may think of Reform, the current system does tug at the fringes of democracy.

Still, for many in the business world the result produced a sigh of relief. Early sentiment, as I read it, is that competence in Government is back - not flashy but broadly solid. An ambitious agenda was set out in the King’s Speech and Rachel Reeves’s feisty critique of the economic realities bequeathed to her presages a challenging Budget on 30 October.

Riots

At the same time, and as The Economist observed:

“Some of the worst race riots since the Second World War hardly fit the image of a newly stable Britain sought by the incoming Labour Government”.

The race riots across the UK in early August were appalling, with mosques, asylum seeker hotels and police officers attacked. And all the more alarming for having spiralled so fast out of misinformation surrounding the horrific killing of three little girls in Southport.

The role of dispersed social media activists in fomenting thuggery is a painful reminder that, in 2024, “the mob” can be mobilised across the country over the internet in a matter of minutes. There is no need for a single “leader”.

The Government’s response was decisive, with increased police presence and swift hearings of the prosecution of rioters and on-line agitators, and this was broadly approved of by the public.

However, the sad reality remains, as further noted by The Economist, that:

“Immigration has become the running sore of British politics, owing to a mix of real problems and political opportunism”.

Not only does the asylum system need overhauling (and Yvette Cooper seems to be making a start) but somehow we need to de-bunk some of the untruths around immigration. For example, the suggestion that there is “two tier policing”, favouring ethnic minorities, sits very uneasily with the alarming statistic that in the year ending March 2023 the police carried out 24.5 stop and searches for every 1,000 black people and 5.9 for every 1,000 white people.

The USA

We have witnessed tumultuous events in the USA…

Joe Biden’s toe-curling debate with Donald Trump on 27 June unleashed weeks of news-dominating anguish as to whether Biden would stand aside. He finally did on 21 July, later in the process than any previous sitting President. He endorsed his Vice President, Kamala Harris, and she swiftly became the presumptive nominee as grateful Democrats threw their weight behind her.

In the meantime Trump had survived an assassination attempt and had built up a head of steam which may have seduced him into selecting a hard charging right winger, JD Vance, as his running mate - a choice which looks too “more of the same” now that Kamala has chosen the engaging and accessible Tim Walz as her VP candidate.

With the Harris/Walz ticket now enthusiastically endorsed by the Democratic Party Convention we have the fascinating prospect of seeing how Trump’s divisive and often mendacious narrative fares in the face of energetic and, whisper it, jolly opponents. The outcome of course has profound implications for the whole world.

Two key thoughts:

• anything can happen in politics; and
• momentum is a precious, but fickle, commodity. Trump had it, now Harris has it. Can she keep it?

France

As Sylvie Kauffmann said in the FT on 30 August:

“Something unusual is happening in France. President Emmanuel Macron is not talking, the country has no government and the people are not complaining. At least not yet…”

It has been a bizarre few months in France.

On 9 June, after it was revealed that Marine Le Pen’s Rassemblement National (RN) had won 31.4% of the vote in the elections for the European Parliament, Macron called a snap election for the Assemblée Nationale. My French wife thought that he had lost his marbles.

It was a gamble of the highest stakes - presumably based upon the thought that the other parties of the centre (such as the Socialists and the Republicans) would link arms with Macron’s party to give a bloody nose to Le Pen and Jean-Luc Mélenchon, of the splendidly named La France Insoumise.

That of course did not come to pass. The Socialists, Greens and Communists lined up with Mélenchon as the New Popular Front (NPF) and the Republicans were divided and fed up with Macron.

The RN triumphed in the first round but were countered in the second round by tactical candidate retirements which left the NPF with the most seats, followed by Macron’s Ensemble coalition. To widespread relief RN came in third. No group achieved a majority so the parliament was “hung”.

It is in the gift of the President of France to appoint a Prime Minister and he has resisted demands from NPF that they should be entitled to nominate the PM. Moreover, as the Prime Minister has to be able to withstand a vote of no confidence you would think that there has to be some reshaping of the coalition blocs to build support behind a candidate. Macron is presumably hoping that the NPF will explode, moving votes to the centrist Ensemble, but that has not happened and he has fallen silent.

Meanwhile, in a dream-like parallel universe, a very stylish and successful Olympic Games has been despatched by Paris. Not that the Olympic good cheer thawed the political ice.

What next alors? This stalemate is a first for the Fifth Republic.

Macron has real timing pressure as a budget, being worked on by a caretaker government, has to be submitted to Parliament on 1 October. If he is not in a position to appoint a PM which parliament will support by then he has a very serious problem. Could he even be forced to resign?

The big takeaway in all of this is that if you are going to take a big calculated risk, be sure that your cost benefit analysis is well tested and that you have brought a healthy dose of humility to that analysis.

Ukraine War

In the early months of 2024, a “frozen war” analysis seemed to be building around Russia’s invasion of Ukraine. Ukraine’s Summer 2023 counter-offensive had not proved a success and the Russians were making grinding progress in Eastern Ukraine.

And then, on 6 August 2024, Ukrainian tanks and armoured vehicles rolled into the Kursk region of Russia. This was the first time that foreign troops had occupied Russian territory since the Second World War. It was an audacious surprise move - and Ukraine claims that it still holds 500 square miles of Russian land.

Vladimir Putin has clearly been embarrassed - and there were videos of him in the early days of the offensive looking irritated and ill at ease.

One can speculate that the idea was to “unfreeze the war”, change the dynamics around peace talks, boost Ukrainian morale and distract Russian troop in Eastern Ukraine.

Some informed commentators are sceptical that Ukraine’s mission can be translated into anything enduring and note that Russian brutal attacks in Ukraine continue and that Moscow is building up its forces on the Povrovsk front in Donbas.

But the fact remains that Ukraine has demonstrated that it can spring a surprise, take the fight to its much stronger neighbour and hold territory and prisoners.

The outcome of US elections could be critical in mapping an endgame in Ukraine and this incursion could just turn out to have been a pivotal moment.

Market volatility

August 2024 was one of the most volatile trading periods for US stocks in years - with other markets also being duly buffeted.

The month got off to a hair-raising start. There was a fear that the Fed had been too slow to cut rates and risked nudging the US economy into recession and a surprise interest rate rise by the Bank of Japan sparked a rapid unwind of the “yen carry trade” (borrow in cheap yen to invest in US and other stocks). This led to a major sell-off, with the S&P 500 losing 6% of its value ($3 trillion) in the month’s first 3 trading days alone.

Then, as if that were just a bad dream, US markets had their best week of the year as traders reflected on strong corporate earnings and recession fears subsided - although it was notable that the recovery was led by traditional dividend paying stocks, like consumer and retail, with the Magnificent Seven lagging (as investors anticipated interest rate cuts).

Still, the recovery was sustained and the S&P 500 gained more than 2% in August. Panic over, for now.

To me this is another illustration of the alarming power of sentiment in global markets. It is a timely reminder that impression can be more powerful than fact in a world where partly developed information travels instantly.

UK Listing reform

The new London Listing Rules came into effect on 29 July and represent the most significant change to the UK listing regime in over three decades.

The key features of the changes:

• consolidation of premium and standard listings into a single class of Commercial Company listings;
• no need for shareholder approval for significant or related party transactions; and
• more flexibility for dual class share structures

will be familiar to market participants.

Will it work to reverse the gradual decline of London as a forum in which to IPO and the drift of London listed companies to the USA (for example, Flutter and CRH)?

Those of us who grew up in, and have an affection for, the London market must hope so. But it’s not clear.

Entities which might have listed in London as it conferred the “governance gold standard” will regret the dilution of investor protections. Others will see the changes as a pragmatic compromise in an increasingly competitive world and important simplifications.

The bigger issues, however, are likely to be around valuation dynamics and investor and analyst depth relative to NYSE and Nasdaq and other exchanges. It is sobering to note, for example, that the share price of CRH plc has increased by more than 50% since it moved its primary listing to NYSE in September 2023.

Takeaways

What messages then shall we take from this roller-coaster of a summer? Five thoughts:

1. Sober competence is not to be underestimated. Boris Johnson brought bravado and theatre to the UK but at a very significant cost. The calm response of Labour to the summer riots and their apparently thoughtful economic husbandry are not flashy but are reassuring.
2. Never assume - one might have thought that Donald Trump was unstoppable after the assassination attempt but the Democrats have managed to turn gloomy resignation into upbeat optimism. Whatever the outcome, this is heartening.
3. Risk taking is necessary but needs to be carefully calibrated. Macron’s high stakes gamble has left France in stasis and facing a very uncertain period.
4. Never underestimate the power of surprise. The audacious Ukrainian counter-offensive is risky but could just be a pivotal factor in the endgame in the Russia-Ukraine conflict.
5. Impressions count - the market roller-coaster which we saw in August is a timely reminder that in a social media world of instant communication facts can too easily be trumped by impressions.

Christopher Saul

Christopher Saul provides independent trusted advice to senior executives and key stakeholders within publicly quoted and privately owned businesses and professional service firms. His areas of focus are governance, succession and the moderation of differences.

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