Paul and Brett's Alpha

The UK general election is over and the foregone result has now been delivered. It has been described widely in the press as a “Labour landslide”, one resulting in a majority so large it has been suggested that it could take many years to whittle away, ushering in stable government for a generation.  

With this seeming to be the case, one could argue there is now very little left to debate, but we are not convinced. Indeed, our only certainty at this point is that there is great uncertainty over the future.  

The first point we think it important to make is that Starmer has not secured an overwhelming mandate from the populus. His party won more seats than anyone else because the Conservatives self-immolated. Many of their lost votes were split between Reform and the Liberal Democrats (the former won 67 fewer seats than the latter, despite garnering ~0.5m more votes overall). Put another way, labour floated to the top of the UK political swamp, owing to the nature of our ‘first-past-the-post’ electoral system.  

Labour’s vote share was only 33.9%, on the lowest voter turnout in 20 years. For comparison, Tony Blair won 43.2% of the vote share in 1997, with a much higher turnout. Indeed, the winning party actually won 0.6m fewer votes in this election than it did in 2019, when it came second to the conservatives and the result in that election was widely considered to be a disaster for Labour! Likewise, the Liberal Democrat’s resurgence to 71 seats from 11 seats in 2019 turned on an additional 0.6% vote share and a few hundred thousand additional votes.  

Many people will (again) have woken up feeling cheated by a system that does not represent their views, but we suspect few will be demanding a change in it; this has never been a subject that attracts great passion in the UK – we voted down a change in the voting system in a 2011 referendum, which saw a turnout of only 42% but with two thirds voting to keep the current system.  

The referendum only happened because the Lib Dems made it a condition of their coalition agreement with the Tories in 2010. Now they have suddenly benefitted from ‘first past the post’ to garner a record number of seats, we suspect they will keep quiet. Turkeys and Christmas springs to mind.  

Why is any of methodological pedantry important? We are where we are. However, it is important to acknowledge this government got here by understanding public sentiment and carefully treading a path that avoided loquacity. In so doing, it did little to offend.  

In contrast, the Conservatives seemed to flounce from one self-created blunder to another, while Reform took the well-trodden populist path of playing to people’s fears and promising they could all be easily addressed. 

This feels like a well-trodden path that an increasingly cynical electorate is growing wise to. As this election has demonstrated, even a small vote share change can profoundly impact the composition of parliament.  

Now the election is over, the real talking and action must begin. If you are not all that popular to begin with, the room for error is probably very low. Starmer could, like Sunak before him, soon find himself facing plunging approval ratings if he missteps. Competency is key, as Scotland’s results, like England’s have shown.  

Even if you have a compelling narrative (i.e. independence in the case of Scotland’s SNP), repeated malfeasance and incompetence will not be forgiven. The SNP dominated Scottish politics for a generation and now they are nowhere. Likewise, in England, the Tories have suffered catastrophic losses mainly because the last administration was viewed as an abject failure characterised by infighting and leadership turnover, rather than focusing on making people’s lives better.  

With various international conferences and the summer recess of Parliament to come in the near future, we probably won’t learn very much more about this new government prior to the Kings speech on July 17th, which will outline the legislative priorities for the forthcoming parliament. This is not as interesting an event as it may seem and we expect the speech to follow the priorities laid out in the Labour manifesto (i.e. kickstart economic growth, cut NHS waiting lists, improve border security, set up a national energy company, increase neighbourhood policing and improve education by hiring more teachers).  

Many of the new government’s priorities are aspirational things that do not so much require legislation as they do competent management and, most importantly additional monies. The retinue of appointments, especially bringing back experienced hands such as Alan Milburn on the healthcare brief) does suggest some recognition regarding the challenges of delivery. 

In all probability, we will need to wait until the fourth quarter, when we expect the Chancellor, Rachel Reeves, to reveal an autumn budget to see how the rubber will really meet the road. This intention should be announced at least 10 weeks prior, so that the Office of Budget Responsibility (OBR) has time to prepare a report on the veracity of the assumptions within the budget that is announced.  

That said, OBR co-operation does not seem to be legislatively necessary. The now infamous Truss/Kwarteng “mini-budget” eschewed OBR co-operation, which was telling in itself, and the final budget did not disappoint in that regard. We would expect Reeves to be keen to establish her credibility and thus her first budget to be accompanied by an OBR report.  

As noted last month, all three main party manifestos looked to us to contain unrealistic pledges that were not fully costed. Whilst everyone was guilty of this, one of the three main parties was clearly more at fault than the others, and that was Labour (the Reform manifesto was hilariously far-fetched on an economic basis; it would not have looked out of place in France, but more of that anon).  

As such, we think additional tax increases will be necessary to secure OBR support for the spending plans required to deliver the manifesto goals. The only pledge Labour made during its campaign in respect of these is that such rises will not impact “working people”. This was later defined loosely as someone lacking sufficient savings to be unworried by unexpected bills. In all probability, we expect the axe to fall on unearned income, inheritance and property (geared toward more expensive homes and second homes). Whilst this has no bearing on the healthcare sector, it is surely of interest to our readers.  

Coming back to healthcare for a moment, we cannot ignore the expectations of Labour’s largest financial backers; the trade unions. 2023 and 2024 were marked by significant disruptions due to industrial action across healthcare, transport and education.  

Now that Labour is in power, the expectations that the government will support the unions in their demands (which go far beyond higher wages) are palpable. In the words of Paul Nowak, General Secretary of the umbrella organisation the Trades Union Congress [he expects]:  

“The biggest expansion of workers’ rights and trade union rights in a generation: banning zero hours contracts, ending fire and rehire, Day One Employment rights, giving unions new rights to access the workplace, new fair pay agreements, lifting up pay and standards across whole sectors of the economy and repealing the anti-trade union legislation, including the Minimum Service Levels.”  

Any fair minded person would not disagree with the sentiments here regarding fair pay and better working conditions. However, everything has a price and, especially in the public sector, any wage settlements will eat into the budget and will thus need to be paid for via higher tax receipts.  

Whilst public sector workers might well feel happier with higher wages, this could impact investment in improving public services. Afterall, there is no magic money tree; the money government spends is our money redistributed via taxation or money borrowed on the bond market that our children are expected to repay via taxation.  

In addition to the impact on the public sector, higher tax and employment costs for private companies may chill investment plans, delaying the acceleration of economic growth on which the Starmer project is predicated. We do appreciate none of this stuff is easy and trade-offs are an inevitable necessity, which is why so many previous governments have spent so long doing nothing, kicking the can down the road for the next guy.  

That game is over now. The ‘next guy’ is on stage and his name is Keir Starmer. Like an England penalty-taker, a whole nation is watching on expectantly, probably hoping for a better outcome than history or cold logic would suggest is reasonable. Moreover, this is the first game in the tournament, and there is a long road ahead.  

Let us finish with some thoughts on Healthcare. Wes Streeting squeaked back into parliament by 528 votes. We should all be relieved this is the case; he seems one of the most pragmatic and reform-minded health secretaries we can recall, and the fact that he will be advocating for change whilst sporting a red rosette probably means he will get a fairer hearing than his recent predecessors did. As noted previously, we think having Alan Milburn on the team is another positive; healthcare reform is not easy and understanding how to approach it can only help (failure is just as useful a teacher as success in this regard).

Why do we rate Streeting? He does not shy away from constructively criticising the NHS; his time as a young cancer patient under its care has clearly shaped his views of the service and the realities of delivering care. He has previously said that his approach would be “to set people free on the frontlines to innovate, to find new ways of doing things and back them to do that”, which is precisely what we think is the correct way to approach reform. As we noted in last month’s missive; the NHS probably knows how to fix itself. What it needs is the time, space and resources to get on with that task.  

Whilst we will need to wait for the details on the government’s wider programmes, they have clearly already shared some details on their ambitions in healthcare. Amanda Pritchard, the chief executive of NHS England has revealed that “three big strategic shifts” would underpin the new government’s strategic approach: moving more care out of hospital into primary care and community services; better use of technology and data; and boosting prevention by supporting people to stay well.  

Streeting followed this up with an announcement that he would divert several billion pounds of planned spending for hospitals into primary care, taking the split of spending between primary and secondary/tertiary services back to historical levels. It is difficult to argue with any of that. 

France is a fascinating country from a political perspective. We can all make flippant comments about how the country seems to be either rioting or on strike most of the time, but the perpetual immiseration of its electorate is worthy of study.  

While we too struggle to find Macron personally likeable, he has, by any objective assessment, been an effective and pragmatic leader for the country, presiding over much needed reforms to investment, employment law and pensions that have enabled the economy to rediscover its vigour: France is no longer the ‘sick man of Europe’, even with these recent years of pandemic-instigated disruption during which almost every economy bar the United States has struggled to overcome significant economic headwinds.  

Unemployment is down to near-historic lows and youth unemployment in particular has fallen significantly (unemployment is still high compared to OECD peers, but the country has Europe’s most generous unemployment provision, so arguably the incentive for some to work is not as high as in other countries). France is now more competitive economically versus its peers and has become a venue for leading start-ups in key areas like Artificial Intelligence and Clean Tech.  

Nonetheless, the French in aggregate remain implacably dissatisfied with their governance, and unutterably pessimistic about the future. Recent regional elections saw the centrist middle hollowed out in favour of support for far left and far right adventurers, whose only common values seem to be to spend money they do not have, offering services that no-one can afford or policies that they cannot realistically deliver within the confines of the EU’s strictures.  

One might expect a similar level of cynicism to that seen in the UK to have crept into the French electorate too, thus dismissing this unrealistic and often unpleasant nonsense peddled at the extremes, but there it feels instead that the votes reflect anger at the lack of real progress. Perhaps the shift to extremes reflect the reality that the previous three centrist administrations have spanned the political spectrum of acceptability (centre right – Sarkozy, followed by centre left (Hollande) and then centrist (Macron) and yet no one is satisfied with the outcomes. Let us hope this is no portent for our own country five to ten years from now.  

Nonetheless, similar patterns are playing out across much of Europe. Few seem to want to accept the reality that a global economy alongside an ageing population and massive technological change ushers an era of higher taxation, more challenged services and greater inequality: technological progress is often marked by periods of winner takes all, much as we saw in the industrial revolution, the gilded age and now again in the internet era. On top of this, immigration controls and free movement make for uncomfortable bedfellows. Nonetheless, we need more workers to support (and pay for) the elderly. If the birthrate is declining, they will need to come from somewhere else.  

Governments have undoubtedly been slow to react to all of these things. Here in the UK for instance, online retailers can do much to lower taxation (corporate tax and VAT) and avoid business rates, creating an unfair playing field versus bricks and mortar retailer. This will only get worse as the net zero push forces physical retailers to invest heavily in premise upgrades that online retailers can largely avoid. We have intentionally chosen an example of something uncontroversial and obvious, about which nothing has been done for decades, but one can easily think of many others that would draw more controversy and more passion from the electorate.  

Coming back to France. The complexities of its two-stage electoral process has long drawn the wry observation that people vote for what they want in round one and vote against the thing they most dislike in round two. With various unexpected political allegiances coming together to frustrate the far-right RN in round two, this sentiment has arguably never been truer than in this election, which has delivered a final outcome that no-one predicted.  

We now have a split legislature and an emboldened far left, who mistakenly think that there is more support for their crazy and unaffordable ideas than there really is. If the left alliance does get any policies through, one of their proposals is to significantly expand healthcare spending (alongside welfare spending), funded through higher taxation.  

Many on the right and in the centre will feel cheated by a calculated anti-far right campaign that saw these allegiances result in some centrist candidates stepping down in round two. The subsequent two horse races in every seat successfully kept the far-right RN from power and could be seen by some as a “deep state conspiracy” to frustrate their wishes. Macron is likely to be even less popular and trusted than before. How long will it take to form a working government? Let us hope France does not become the new Belgium in this regard. Whatever happens, France cannot have another election for twelve months.  

Where does this end? At the risk of sounding like a broken record, the Western world needs to have more grown up political conversations about the reality of how government finances work, what is actually possible in terms of tax and spending in light of demographic realities, and thus the trade-offs that inevitably need to be made. Populists should not be able to campaign on unrealistic and uncosted promises within such a debate.  

We fear that France is staring into a wilderness period of political instability and gridlock, at least for the next two years. All the while, the structural challenges that it faces will continue to mount, just as they will for every other developed nation.  

Many of you might dismiss the French election as unimportant. After all, the wider EU is the marketplace and there we have some stability with Ursula Von der Leyen continuing at the helm and it has little global importance from a healthcare perspective. This election matters because of what it tells about the potential chaos that could follow if our leaders do not soon grasp the most important issues of our time and convince the public that they have deliverable solutions to see us through them. Patience is finite, as is hope. Indeed, many of the narratives described previously come together in the current situation in the United States. 

Whilst half the world’s population is facing an election this year, the November election in the US is undeniably the most geopolitically important of them all. Not only because of the importance of the US economy (and the threats of tariffs etc. if Trump wins) but because of the potential consequences around NATO etc.  

What we face here seems to be insurgent populism versus the continuation of the current status quo which is neither fiscally sound (rising primary deficit) nor creating the sense amongst the American populous that things are going well, even if the US economy is outperforming almost everyone else. Democrats crow that Biden gets no credit for his achievements in office, and this seems a fair comment to us. Republicans retort that it is all deficit-driven binging, which is also fair.  

If one can be objective about politicians, it is unarguable that Joe Biden was a great man. His career in the Senate goes back to the early 1970s and his record attests to his playing a significant role in the passage of various important pieces of legislation, not least the Affordable Care Act.  

However, his performance in the recent televised debate with Donald Trump was alarming and has rightly led to discussions about his fitness for office, not least because it is not the first example of cognitive decline that we have all witnessed.  

The betting market seems to have spoken on this issue some months ago, with odds moving gradually in favour of Trump at the expense of Biden, pre-dating the precipitous fall in odds for Biden that followed his debate performance. As was the case in Britain, with the Hobsonian clash of brilliant minds that was Starmer vs. Sunak, the neutral observer may well wonder if a 78-year old convicted felon, and a clearly struggling 81-year old is the best this dynamic nation can offer to its people and to the world.  

Regular readers will know that we have generally been rather dismissive of this US election cycle from a healthcare sentiment perspective, believing instead that the focus was going to remain on foreign policy, taxation and environmental issues.  

However, if Biden does step down, which he shows no apparent willingness to do at the time of writing, we could see a whole new and abbreviated Democratic primary contest taking place in the run-up to the Democratic convention taking place from 19-22 August. This is the only situation in which Biden can be forcibly replaced as candidate.  

Such a discussion could lead to healthcare policy surging back onto the agenda. This uncertainty has already been unhelpful for the relative performance of the sector versus the wider market; with a 250bp spread in the performance of the S&P500 Healthcare sub-index versus the parent S&P500 Index in the week following the debate.  

Moreover, Trump does not seem to be someone who requires much solicitation to make more emboldened comments, and he may now feel that he has more latitude to unleash his ‘inner Donald’ and thus stray from the carefully constructed narrative of his “Agenda47” website (which barely mentions healthcare policy).  

In this regard, surely no section of the economy could consider itself immune from perceptions of elevated political risk, or from the risk that policies enacted by the next President (whoever that may be) will stoke inflation just at the point when we were on course for interest rates to come down.  

The independence of the Federal Reserve itself may even be up for debate. If anyone is wondering about the benefits of fiscal independence, Turkey is a recent good example of an OECD (i.e. developed) nation with a growing economy that has been hampered by political interference in interest rate setting. 

What does all of this mean? It is difficult to say with any confidence, but one can probably conclude that the headline risk to all asset classes from macro-economic and geopolitical factors is likely to remain elevated over the balance of 2024 and into 2025.  

If this cloud does have a silver lining, it is surely that the defensive growth characteristics of the healthcare sector in aggregate cannot be imperilled by political or economic changes, simply because the drivers of volume growth are demographic and thus inexorable. Moreover, the sector remains attractive from a valuation standpoint on both a relative and an absolute basis. At some point, people will begin to appreciate this, and look beyond shares in Novo Nordisk and Eli Lilly as a way to participate in it.  

We always appreciate the opportunity to interact with our investors directly and you can submit questions regarding the Trust at any time via:  

shareholder_questions@bellevuehealthcaretrust.com  

As ever, we will endeavour to respond in a timely fashion and we thank you for your continued support during these volatile months.  

Paul Major and Brett Darke