Laura Foll, Portfolio Manager on the Global Equity Income Team at Janus Henderson Investors discusses what a likely incoming Labour government could mean for investors and their sentiment towards UK equities.
UK equities: Labour’s pro-growth plan sparks investor optimism
The likely ascendancy of a Labour government heralds an era of political stability, a focus on growth, and a thaw in European relations post-Brexit. These tailwinds set the stage for improving investor sentiment towards UK equities.
Shift in investor perception
The overwhelming feeling among investors is that UK politics has been a “massive drag” on sentiment towards UK equities. Labour’s promise of political stability contrasts with the volatility of the past eight years under the incumbent Conservative Party. A Labour government, with a working majority that isn’t beholden to the left of its party represents a “clearing event” for the country.
Another major advantage of the incoming Labour government is when viewed in relation to what is occurring politically among its European counterparts, with the UK fast becoming one of the most stable political regimes in the region.
Across Europe governments that were in power during the Covid-19 pandemic and cost-of-living crisis are falling out of favour with voters. In France, President Emmanuelle Macron has seen his popularity wane, and the results of the first round of the parliamentary elections this week demonstrates that his snap election risks political upheaval and civil unrest.
In Germany, Chancellor Olaf Schultz is also losing favour among the electorate. Arguably, the only European politician that is growing in popularity is the Italian Prime Minister Giorgia Meloni.
Relatively, the UK, from a political standpoint, is looking in far better shape. This is translating favourably, especially in the world of small cap equities, with the UK currently outperforming European counterparts. The Numis Smaller Companies ex-Investment Companies Index (6.1%) is outperforming the MSCI Europe ex-UK Small Cap Index (3.0%) YTD by 3.1 percentage points.
Warmer relations with Europe?
If the incoming Labour government makes good on its promise to build bridges with the EU, it would be well-received by the UK equity market. Starmer, however, has been clear that his party is not looking to rejoin the EU, nor the bloc’s single market and customs union.
Indeed, the only specific measures that the Labour party has committed to include are a new veterinary agreement, increased rights for touring artists, and mutual recognition of professional qualifications.
As it stands, in order to get into power, the Labour Party has not promised anything particularly new or interesting. In many ways, they have created a rod for their own back for when they do get in to Number 10.
Growth mindset
Labour’s strategy for growth is centred on reforming industrial strategy and planning procedures, with the goal to tackle the fundamental issues plaguing the UK’s economy, notably the alarmingly low investment rates.
While past Conservative administrations have pinpointed the planning system as a barrier to economic progress, they struggled to navigate the deep-seated resistance. By contrast, Labour seems committed to achieving meaningful planning reform and a substantial majority would result in them having the means to drive this through.
Importantly, Labour could implement some of its planning changes swiftly, especially those related to infrastructure, which is seen as a more critical economic focus than housing development.
Starmer has proposed to unveil new national policy statements for significant national infrastructure projects within the first 100 days of taking power. This initiative aims to expedite planning permissions, a crucial step if Labour intends to achieve its ambitious manifesto goals to increase onshore wind capacity, expand solar power threefold, and quadruple offshore wind production by 2030.
Further, Labour plans to bring back mandatory housing construction quotas for local authorities, and to modify the rules around compulsory purchase orders to simplify and reduce the cost for developers to compile land plots, unleash low quality ‘grey belt’ land from the ‘green belt’.
If Labour can put a bit of life back into the housing market, there should be a big multiplier effect across the economy. The UK stock market has quite a big exposure to house building. The UK repair, maintenance and improvement (RMI) sector are significant sectors in the market that would benefit from these reforms.”
