With last night’s exit polls indicating a Labour landslide, the die was cast. Now we know that Labour has secured a massive majority in the House of Commons following yesterday’s general election. The Labour leader, Sir Keir Starmer, has become Prime Minister and in his victory speech earlier this morning, he said ‘change begins now’.
But what sort of changes might be on the radar or investment strategists and managers? With many of us across the industry perhaps feeling a little jaded this morning after a long night watching the election proceedings unfold, there will be much to consider in the days, weeks and months ahead. What will be the impact of this new Labour government on taxation, on pensions, on markets, on gilts, on the pound? We’ll be bringing you all the latest election news and views from across the industry here on Wealth DFM.
Experts from across the industry have been sharing their reactions to today’s election landslide result with us as follows:
Lindsay James, investment strategist at Quilter Investors said: “Labour has won a landslide that is not just historic, but utterly devastating for opposition parties. Thanks to the quirks of the British electoral system, Labour has not had to increase its share of vote considerably to completely flip the make up of parliament. This highlights the precarious job they now have to govern a country that is experiencing difficult economic challenges that many in the population will expect to be fixed quickly.
So far the financial market response has been fairly muted with the pound holding on to recent gains overnight. Businesses and investors have foreseen this result for some time and have been comfortable with the messages that have emanated from Labour. It will not want to upset the apple cart, although now it is in power it will be interesting to see how much they deviate. Labour has focused on economic growth being at the heart of everything they do. Boosting growth from its currently stagnant levels is going to be difficult to do given the tax and spending challenges facing the new government. Interest rate cuts are also not likely to be delivered at the pace that some in the party will like and as such Labour is inheriting a tough economic environment that has no easy quick fixes.
“And while the City is comfortable with a Labour government, it too will want to see substantial and concrete plans to reinvigorate the London market. Labour governments have not been considered natural allies in the past, but the demise of the London market will require it do give it some sort of stimulus, especially if it wants growth to return to the economy. Getting more businesses choosing to list in London would be a positive start, but a lot needs to be done to also prevent companies currently listed here moving elsewhere or going private.
This is a fascinating election result and Labour will quickly discover the challenges that face them and the potential this has to hold back its agenda. Given how the votes have played out, it is unlikely the population will give them a long leash and as such clamour for change and improvements will be swift.”
Trevor Greetham, Head of Multi Asset at Royal London Asset Management said: “Markets aren’t hugely interested in the UK general election but policy choices over the next few years will be critical with investors likely to face further bouts of inflation.
“In contrast to the situation in France, the outcome of the snap election in Britain was never really in doubt and macroeconomic policy differences between the main parties are, on the surface, minor. It’s a world away from 2019 when Boris Johnson faced up against Jeremy Corbyn with Brexit in the balance. Labour has inherited an unrealistically tight fiscal baseline for departmental spending and their manifesto offers little insight into how they will improve public services without a further substantial rise in taxes and/or debt, both already at a half century high as a share of GDP. Keir Starmer has proposed various measures to boost economic growth, which are welcome, but meaningful improvement may prove elusive if he sticks to his promise to keep Britain outside the EU Single Market and Customs Union, or a ‘Hard Brexit’ in 2019 parlance.
Meanwhile, the battle against inflation is by no means won and an uncertain geopolitical backdrop, populism and a drop in fossil fuel capacity as we transition to net zero all point to further cost of living surges in coming years. If these are seen as ‘just’ spikes, the Bank of England is likely to accommodate them, and unanticipated inflation could help Labour with their fiscal conundrum by pushing incomes above tax thresholds and debasing the real value of government debt.
This would merely be a continuation of the way UK policymakers have responded to shocks over the last 20 years, from the Global Financial Crisis and Brexit to Covid and the Ukraine invasion. In every case, inflation was allowed to overshoot in order to avoid even more painful choices. This is why, as multi asset investors, we believe it makes sense to invest across a broad range of asset classes, including the likes of commodities that can rise in price when inflation hits.”
Following the Labour Party’s win in the UK General Election – Seb Beloe, Partner and Head of Research at WHEB Asset Management, has said: “The election result today is an emphatic nod from voters of a desire for change.
“As an investor in businesses in the UK and around the world, WHEB firmly believes in the power of private enterprise to develop and deploy solutions critical to social and environmental challenges. Nevertheless, Governments can play an important role in giving clear direction and providing policy support to encourage private enterprise to play this role.
Labour has stated its intent to ‘make Britain a clean energy superpower’ and of its commitment to becoming a Net-Zero economy. Yet, the devil is in the detail. An easy first step in proving its commitment is to make good on its manifesto promise to reverse the Tory decision to prevent the Bank of England giving due consideration to climate change in its mandates.
We hope the new [Labour] Government embraces its role to advance the sustainability agenda for the betterment of this generation [while also not compromising on the ability of future generations to meet their own needs].”
Ben Ritchie, Head of Developed Market Equities, abrdn, says: “A landslide victory provides the sort of clarity and stability that equity markets need in an increasingly volatile world. Labour’s pro-growth agenda is key to delivering the tax revenues needed to fund public services, with private capital playing a vital role in supporting investment. If the new Government get this right, businesses with significant exposure to the UK economy should be the likely winners – a shot in the arm in particular for companies in the FTSE 250 and FTSE Small Cap. With just a little more patience, investors could finally be rewarded.
A key priority for the new Government should be to make UK equities more attractive for both domestic and international investors. One of the quickest and most effective way to deliver this is to scrap stamp duty on UK shares, making Britain more competitive, rewarding savers and attracting vitally needed inward investment.“
Commenting on the General Election result this morning and the macro-economic impact, Ina Rinas, Senior Investment Strategist, Cardano, said: “The polls were right – today the UK wakes up to a new Government. The Labour party has secured a landslide victory.
“Nevertheless, the Labour party’s dominance at the ballot box does not usher in any profound change in the direction for the UK’s finances nor its economic trajectory. The extent to which any expansionary public spending is possible is limited by the UK’s net debt rule – meaningful surprises on fiscal policy are unlikely. Our economic projections forecast modest improvements in economic growth, following the technical recession at the end of last year.
The immediate market reaction has been positive on the margin. In overnight trading sterling (traditionally the best gauge of market sentiment on politics) was 0.05% stronger against the US Dollar and flat against the Euro, which would have been muted due to the 4th July holiday in the US. The 10 year gilt yield has fallen by three basis points and FTSE-100 futures have risen by 0.3% on the London open.
The Bank of England will continue to conduct monetary policy independently. The election result will have little bearing upon their decision making. Whilst headline inflation fell to match the Bank’s 2% target last month, we continue to expect the Bank to move cautiously. Services CPI, a key point of focus for the Bank, remains elevated and sticky. We do however expect underlying inflationary pressures to ease gradually through the year and for the Bank to start cutting rates in August.”
Chris Cummings, CEO of the Investment Association, comments on the result of the UK General Election:
“On behalf of the investment management industry, I want to congratulate Prime Minister Keir Starmer and all members of the incoming Labour Government.
We share the new government’s ambition to drive economic growth and build the financial resilience of our nation. There is much our industry can do to support the UK economy and people across our country, and we are keen to work with the new government to deliver a fast-growing economy.
This includes channelling productive capital into more thriving British businesses and infrastructure projects, helping more individuals to benefit from the higher pension and savings levels that investing can build, and fostering excellence in our industry with a highly skilled workforce that can continue to provide the best possible service. The UK has a world leading investment management industry which can be the drumbeat of economic growth.
We look forward to working closely with the new government to achieve these goals and deliver a globally competitive economy.”
James Lynch, fixed income manager at Aegon Asset Management:
‘A seismic political result overnight. Not enough superlatives to describe the collapse of the Conservative vote, the worst in history. However, this was not unexpected. No reaction in the currency and no reaction in the Gilt market.
Given the size of the majority for the Labour party, Keir Starmer will be the most powerful leader since Tony Blair. He will be able deliver significant change for the country and push through many reforms. But the election was won for Labour on basically a ‘change’ vote, being the anti-tory vote rather than an enthusiastic endorsement for a labour mandate, which we can see in the vote % rather than the number of seats. In the election campaign we did not see Labour offer a significant shift in major policy areas, especially economic policy. We may look back in 5 years time and recognise the impact of this result had on the UK and the economy but right now we simply don’t know what that will be.
This is one of the reasons there has been no reaction in the market since the election was called and none since the election result became clear overnight. It’s difficult to argue much will change in short order, therefore the market carries on regardless.’
One of the legacy’s of Liz Truss, who incidentally lost her seat last night, is that there has been much more attention on the relationship between politics, economic policy and the bond markets not just in the UK but in other countries, no one wants a repeat of that period. But for now, the gilt market will no doubt go back to looking at the latest inflation figures, BoE speeches and following US Treasuries for guidance.’
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The issue of misleading cost disclosures is well documented, and the case for reform won cross-party support in the last parliament. However, the previous government failed to deal with this problem before the General Election.
Investors need accurate, clear and useful information to make good decisions, but under current rules they are still being supplied with misleading disclosures that double-count costs. We are calling on the new government to act swiftly to resolve these issues and I will be writing to the new Economic Secretary as soon as they are appointed. I am urging our members and other stakeholders to do the same.
We are restating our call for investment companies to be taken out of scope of regulated cost disclosure, returning them to the position they were in before 2018. In addition, we need to see an end to the misleading aggregation of costs by investors in our sector and a fundamental reform of disclosures made to retail investors by platforms, advisers and wealth managers.
This is an opportunity for the Labour government to chalk up an early success. Officials within the Treasury have already done much of the necessary work and resolution will not eat into any parliamentary time, allowing the new government to press forward with what I am sure will be a very full agenda.
Front and centre of the Labour manifesto was the need for growth and wider wealth creation. Investment companies are perfectly positioned to support those aims, but to do so effectively, there must be an end to regulations that mislead investors and damage the sector.”
Isabel Albarran, Investment Officer at Close Brothers Asset Management comments:
“Today’s long-expected Labour majority will likely to be welcomed by the UK market, providing a much-needed dose of certainty to the country’s politics. We have already seen an impact ahead of the election, with flows into UK assets having strengthened over the last month, but for this to become a sustainable trend, the UK’s growth prospects need to improve.
The scale of Labour’s win is remarkable, as is the revival in support for smaller parties, such as the Liberal Democrats and Reform UK. While a significant win for Labour limits the influence of the left of the party, the Conservatives are likely to move to the right, to challenge Reform UK.
At a sector level, today’s result mandates Labour to implement significant changes, but this will take time. Nonetheless, measures such as proposed planning reforms to the housebuilding sector, increases in renewable energy generation, and the formation of GB Energy will impact markets over the longer term.
While the immediate market impact of today’s, well anticipated, election result has so far been negligible, policy announcements later in the year could move the needle. Today’s cabinet appointments will give us a first glimpse of the policy agenda, and the King’s Speech later this month will set the tone for the new Parliament, while the European Political Community meeting will give a sense of how relations will go with Europe. Crucially, the Autumn Budget, likely to come in September or later, will give us the best indication of the true impact of today’s result on markets, providing the key fiscal decisions ahead of the December Spending Review deadline.”
Tim Service, Investment Manager, UK Small & Mid Cap Equities at Jupiter Asset Management said:
“After nearly a decade of political shocks in the UK, today’s election result feels unusual for a Labour win having been so predictable. I expect this to be good news for the UK equity market over the medium-term, if for no other reason that markets and companies alike crave certainty. A government with a clear mandate will give companies confidence to hire people and invest in the future, while markets can better discount future company profits accurately.
However, ‘certainty’ is a still a relative concept given Labour’s campaign rhetoric to deliver change – so it’s important for investors to consider how new legislation, tax and spending plans might affect individual companies. We hope that Labour can start addressing productivity issues through planning reform and infrastructure investment, while also reenergising the UK’s capital markets. We are encouraged that Labour seems to recognise the problems, but would stress the urgency with which the remedies are required.”
Commenting on what the UK’s General Election result means for the economy, Julian Howard, Chief Multi-Asset Investment Strategist, GAM Investments, said:
“Labour have won a significant landslide victory over the Conservatives in the UK’s general election. The FTSE 250 index of more domestically-orientated stocks was already posting strong gains by mid-morning the day after the vote, and the pound was a touch firmer against the US dollar at USD 1.28. But for the incoming government, the economic challenges are significant. It is true that the economy itself is now slowly healing, with inflation now down to the 2% level year-on-year, potentially giving the Bank of England scope to start cutting rates soon.
But the primary challenge will be around growth and productivity, both of which have been lacklustre since the global financial crisis. According to the latest Bloomberg survey of economists, UK growth is set to be just 0.7% for 2024, in stark contrast to 2.3% expected in the US and even France, where 0.9% of growth is forecasted. Sir Keir Starmer repeatedly emphasised the “No. 1 priority” of growth during the election campaign but remains constrained in how this might realistically be brought about. Any talk of re-entry to the EU, even the customs union, is firmly off the cards so as not to have risked votes during the campaign. This leaves Britain for now on its own in a world increasingly turning to protectionism.
Further, significant fiscal expansion seems unlikely given how the 2022 Truss government was effectively brought down by an un-cooperative gilt market. Inward investment is the remaining potential driver and not an unrealistic prospect given how unsettling the last few years of chaotic Conservative rule have been for business. But higher taxes on ‘the rich’, on areas such as pensions, school fees, non-doms, among others, will raise questions around how deep Labour’s commitment to business really is. In the meantime, markets can and are taking the win on the prospect of some long overdue stability.”
Peter Goves, Head of Developed Market Debt Sovereign Research of MFS Investment Management, on the results of the UK general election:
‘As expected, limited market reaction in gilts or FX on the UK election result. This is in contrast to the volatility associated with the French election. This is largely due to the result being in largely in line with expectations and because public finances leave limited room for radical fiscal manouevers – regardless of who is in government. Gilt supply will remain high too and this is also already appreciated by investors. As such, together with global drivers, the gilt market will retain its focus on the BoE policy rate outlook and the data – the data specifically included in the BoE’s reaction function, namely services inflation, wage data and labour market tightness. We continue to pencil in a cut for August and as such remain broadly constructive on gilt yields over the medium term.’
Ed Legget, co-manager of the Artemis Select Fund, said: “The election of a new government takes away another one of the objections for not investing in the UK stock market.
The Labour party used the words ‘stability’ and ‘change’ continuously during the campaign, and businesses will certainly be looking forward to a sustained period of stability after all the turbulence of the past five years.
We’ve said for a number of years that the UK economy is in better shape than many commentators have suggested. Unemployment remains low, there’s a high savings rate and increased corporate confidence, and consumer spending is set to rise sharply – particularly with an expected interest rate cut probably not far away.
The other missing part of the jigsaw is more support for UK equities from pension funds and institutional investors.
The new government is committed to a review of the pensions landscape to consider what further steps are needed to improve pension outcomes and increase investment in UK capital markets.
This could help reverse the relentless decline in the domestic UK equity base and in doing so reverse the relative underperformance of the UK market over the past decade.
The relative political stability of the UK could see it become something of a safe haven for investors as other parts of the developed world move into an era of greater political uncertainty. We could be about to enter a new dawn for UK equities.”
Lloyd Harris, Head of Fixed Income, Premier Miton Investors, commented:
“We think that Starmer’s plan for growth in the UK will be tested by the gilt market.
With full employment in the UK, the only way to grow is to increase wages, unless there are new entrants into the labour market through either increased immigration or greater necessity to work. With both these options off the table, the only outlet can be wage growth, which will keep services inflation sticky.
We think investors should look to Labour’s “new deal for working people” for the future path of inflation. With the UK being primarily a services-based economy, wage costs are a major input into the path of inflation and hence future interest rates and bond yields.
With a real zeal from the Labour party to boost wages in the UK, many services and goods are set to become more expensive. The implication is that “higher-for-longer” bond yields are cemented through policies on employment introduced in the first 100 days of this Labour government. By linking the minimum wage directly to the cost of living it becomes easier for inflation to become entrenched. Put together with a dash for growth and already tight labour markets, the suggestion is inflation on the services side could remain sticky.
A microcosm of this is housebuilding. If planning laws are relaxed and more houses get built, then without a greater number of tradespeople to build the houses, wages in this sector are set to rise and the cost of building a house will go up.
We think Labour’s plan for growth at a time of full employment will lead to higher borrowing costs in the longer-dated parts of the gilt curve especially, and we prefer short duration bonds.”
Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin commented on the election result:
“Investors see a strong majority giving a strong mandate to govern for the party and its leader. It suggests a period of stability after years of turmoil, however there are no guarantees. The last election in 2019 saw a Conservative landslide but calm was nevertheless quickly followed by a storm.
There is no real market reaction to these events as a substantial majority was considered very likely. The fact that it is bigger than expected doesn’t change much.
Housebuilders are amongst the leaders this morning and they are seen as beneficiaries of Labour’s plans to drive more housebuilding and make planning permission easier. Labour has promised a blitz of planning reform to quickly encourage new housebuilding but it will be unpopular amongst some within constituencies. As one of the landmark policies of the new government the size of the majority may make this politically contentious battle with the NIMBYS easier to win.“
David Zahn, Head of European Fixed Income at Franklin Templeton commented:
“The UK election results are counted and Labour has a substantial majority in parliament. This will make legislating their agenda fairly straightforward. Investors will be most interested in the first budget in October where we will learn the plans Labour have for the economy, spending and financing of the government. There should now be a period of stability in UK politics as this parliament should last 5 years giving the Labour party time to implement their agenda. We anticipate Labour wanting to maintain the fiscal responsibility without any major structural changes which should be supportive for UK Gilts, especially as we anticipate the Bank of England to embark on their interest rate cutting cycle.
However, the longer term the political discord in the UK should not be underestimated. The Labour party won just 34% of the popular vote but received 64% of the seats in parliament due to the first past the post approach. Therefore, Labour should craft policies to help bring the remainder of the voters towards Labour. Investors will have to see if the Labour party are thinking along these lines. Lastly, the political parties are much more broad than in past elections, with four parties gaining more than 10% of the popular vote: Labour, Conservative, Reform UK and the Liberal Democrats. Therefore, this was another example of an election where it was against the incumbent party and a splitting of the electorate.”
