Is the UK ok?

26 May 2026

• Local elections could have profound market implications
• Politics appears divided over redistribution versus growth
• Gilts, stocks and currency are all repricing to reflect uncertainty

UK markets gave investors plenty to think about with the local elections of 7 May. Whereas the Iran war seems not to be affecting the S&P 500 at all anymore, the immediate market response in the UK has been notable. In the wake of the Labour party’s significant local election losses across the country, gilt yields climbed, the FTSE 100 fell and cable (sterling versus the dollar) was highly volatile. Investors both international and UK-based may quite rightly be looking to learn lessons from this latest episode of UK instability. In particular: are gilts likely to remain reliable diversifiers whose yields are not going to be materially impacted by unwanted capital losses; is the FTSE 100 really able to offer an alternative to the ‘’mighty’’ S&P 500 for investors; and finally, will sterling be stable enough not to distort profits and returns as they are translated back into pounds both for UK-based firms and investors?

Reality ’cheque’: paying for the extended state spending increase

The gilt market’s response to the elections may reflect a longstanding issue, specifically the growing perception that Britain may be living beyond its means. Debt to Gross Domestic Product (GDP) now stands at nearly 94%, roughly where it’s been since the pandemic and the eye-wateringly expensive government response at the time (£310 billion to £410 billion¹, according to official estimates). Similarly, the UK’s budget deficit is now nearly 5% of GDP, lower than its post-2008 high of 10% and pandemic high of 15%, but still higher than the 2000-2007 period when it rarely went above 3%*. Repeated shocks have forced successive governments into high spending, but it doesn’t end there. Persistent worklessness and long-term sickness across sections of the population have resulted in an unsustainable welfare bill. This alone is expected to cost the taxpayer £337 billion² in 2025-26 according to the Department for Work and Pensions.

The kindness of strangers is wearing thin.

The gilt market is a key borrowing facility for the UK and the (until fairly recently) perceived reliability of the UK government has meant that international bondholders have typically been happy to buy up UK debt in return for the yields on offer. However, as Britain has grappled with an increasing debt load the role of these lenders – who now hold nearly a third³ of the UK’s outstanding gilts – has become ever more important. Bank of England then-governor Mark Carney noted at the time in 2016 about the “kindness of strangers” willing to buy UK gilts when they were starting to become less reflective of their literally ‘gilt-edged’ status. The short-lived Truss government of 2022 - in which sweeping unfunded tax cuts were proposed - saw patience run out with the UK and 10-year gilt yields approached 4.5%* as lenders applied a risk premium to the asset class.

Kind, to a point – UK gilt yields have crept higher as the UK’s debt load increases:

Data as at 31 Dec 2025

Bond market ‘vigilantes’: markets highly sensitive to fiscal policy

Fast forward to today and as of 14 May the 10-year gilt yield stands even higher at just over 5%. The proximate cause is the prospect of a leadership change in the Labour Party as frustrated MPs seek a change in the aftermath of the local elections. The thinking goes that voters want to see a bolder shift to the Left to address the country’s challenges of inequality and cost of living. In a post on X on 10 May, just days after the election, former Deputy Prime Minister Angela Rayner declared that “This level of inequality is the outcome of a model built on deregulation, privatisation and trickle-down economics. We have a chance to fix this.” This, along with her support for Mayor of Greater Manchester Andy Burnham as a potential leadership candidate, may have contributed to the impression among some investors that more spending is on the cards. The prospect of a Burnham premiership in particular appear to have led to some market sensitivity given his comments: in 2025 that the country should not be “in hock” to the gilt market, his suggestion this year that increased defence spending could be exempt from the UK’s self-imposed borrowing rules and also his belief that an additional £40 billion could somehow be raised for new housing. It therefore seems likely that any replacement for Prime Minister Sir Keir Starmer will be more willing to adopt a more ambitious agenda, one that could raise public spending still further. This in turn suggests that the gilt market could continue to act as the volatile barometer of Britain’s fiscal health, potentially compromising its role as a steady source of income and diversification until a more disciplined approach is brought to bear, either voluntarily by government, or at the insistence of the bond market demanding higher yield before buying bonds.

Double trouble: rising business costs and domestic political uncertainty hit sentiment

As for the UK stockmarket and currency, the response to the election was similarly notable. The FTSE 100 was down -1.6% on the day of the elections, -0.4% the next day and the sessions since have seen only partial recovery. Already grappling with high business costs, the stockmarket has ‘’taken fright’’ at the prospect of a leadership change, despite Prime Minister Starmer’s relative unpopularity. Cable also displayed volatility, slipping on the day of the election before recovering and then slipping again. A stable currency is especially important for the UK stockmarket, with FTSE Russell noting in 2024 that over 80% of the FTSE 100’s revenue now comes from overseas⁴. This does not necessarily mean that an outright weakening currency is a gift to the firms making up the index if it in fact reflects political uncertainty over the future tax regime at home. The immediate response to the elections and their aftermath appears to illustrate this. Now after a run of strong performance in the last couple of years amid a global rotation into cheap markets and commodity strength, the FTSE 100 potentially faces a fresh source of home-grown uncertainty.

Investable, but not irresistible - the pragmatic case for UK exposure

None of the above may sound particularly encouraging for investors but it doesn’t necessarily mean the UK should be studiously avoided either. It may seem sensible to maintain a modest gilt exposure in portfolios as part of a broader diversified government bond allocation to provide protection against extreme market events. After all, the UK government is not generally considered likely to outright default on its debt obligations even in extremis. As for the stockmarket, the FTSE 100 remains something of a value proposition, trading at just over 13x price / forward earnings versus the more expensive 22x for the S&P 500* as at 14 May. That said, outright overweights to UK stocks and bonds may be difficult to justify while Britain’s politics grapple with the simple fact that there is just not enough to go around in today’s low growth economy. For UK-based investors – as distinct from investors into the UK – there could yet be a consolation to all this. As returns from successful overseas investments such as the US tech sector are translated back into pounds, there will be more of those pounds accruing if the currency adjusts downwards to reflect Britain’s parlous state. This may leave globally orientated but UK-based investors in the somewhat conflicted position of potentially benefiting from continued chaos, but the pragmatists among them will probably just be grateful for the hedge.

Sterling service – weaker currency has helped UK-based investors’ global equity returns in GBP:

From 11 May 2011 to 11 May 2026

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.