Investment impact of Labour’s win

At a glance:
  • Labour’s expected electoral victory could lead to a short-term uplift for UK shares.
  • The election outcome is unlikely to influence the short-term trajectory of interest rates or inflation.
  • Although Labour has some big plans, it will likely face financial constraints, so the Autumn Statement will be one to watch.

Labour’s decisive majority win in the General Election is likely to be initially taken positively by markets, according to St. James’s Place (SJP) CIO, Justin Onuekwusi.

“The UK election has played out as expected and has consolidated our positive view,” he says. “The clarity of outcome and resultant policy certainty going forward should lead to confidence in the growth outlook for the UK economy. The new Labour government may be seen as a boon for broader trade relations though any planned policy changes are likely to take some time to implement, so there is unlikely to be any immediate economic effects from this election result.”

The election outcome may result in a short-term uplift, but Justin believes there are longer-term reasons to favour UK companies – of all sizes – post election.

Joe Wiggins, investment research director at SJP, adds: “The UK has been a deeply unloved area which is now trading at historically depressed valuations.” In his and Justin’s view, this should make it a reasonably attractive area for investors with a long-term mindset and the election result has not changed this.

Market sectors

Within the UK market, Justin points out sectors like infrastructure and defence may experience a boost over time from the election result. Labour’s manifesto outlined spending intentions in areas such as £24 billion on green initiatives. It also indicated it will set out a path to spending 2.5% of GDP on defence. The energy sector, on the other hand, may experience some volatility until greater clarity is seen with respect to what, if any, windfall tax changes may be implemented, he adds.

He adds: “These are likely eventual implications rather than any expected immediate impact. In reality, even with a large majority, in the near-term Labour is most likely to be focused on conveying stability. Therefore, we do not anticipate any announcements that would shake markets or have an outsized impact on specific sectors ahead of the Autumn Budget. Greater clarity on policy initiatives will come towards the back of the year as the new Government gets settled.”

Housing market

As the new Government begins work, eyes will look to see what impact will be had on the UK housing market. Among Labour’s pledges ahead of the election was a commitment to building 1.5 million homes in the next Parliament. That equates to some 300,000 homes yearly – a pace of housebuilding not seen since the 1960s.

This ambitious target may need to be accompanied by major changes to the UK planning system as well as addressing labour shortages, Hetal Mehta, head of economic research at SJP, comments. The reality is this commitment will take time to feed through, but even ahead of the election there were positive signs in housing, she adds.

She says: “In the run up to 4 July, the UK housing market saw an upturn in activity and prices were edging higher. Although the average mortgage rate homeowners face is likely to carry on rising as fixed rate deals taken out more than two years ago come to an end, new mortgage rates are now slightly below recent peaks. Mortgage approvals are also rising.”

Rates and inflation

Given the independence of the Bank of England and the likely continued prioritisation of fiscal stability, Hetal doesn’t believe the election results will have any immediate influence over the direction of UK interest rates. UK inflation was already falling this year. And the Bank of England had flagged its next move was likely to be a rate cut well before the election, she says.

Still, Hetal notes the macro backdrop is much tougher for Labour this time versus the last time it was in power. Compared to 1997, growth today is lower and inflation is higher. The economic backdrop for the new Government is also more challenging, Hetal says, with a wider deficit, and significantly higher level of debt.

“Given the fiscal situation, the Government may not be able to borrow or grow its way out of trouble. Most spending cuts are likely to be unpalatable to this Government. If further tax rises need to be found, changes to so called ‘wealth taxes’ could eventually be on the cards.” The Budget this Autumn will be key in assessing this, Hetal adds, so we do not expect any immediate changes.

Source: Macrobond and Bloomberg, 03/07/2024

Gilts

UK general government debt exceeded £2 trillion for the first time in 2020. Ahead of the 2024 election the level of debt had grown close to the annual value of everything produced in the UK economy (i.e. 100% of GDP). Given the state of public debt Labour is inheriting, fund raising via the gilt market is expected to be muted, Justin says.

The election outcome’s impact on UK government bonds (gilts) is also likely to be minimal, Justin and Hetal note. In 1997, when Labour last came to power, gilt yields were largely flat and have been in every subsequent election since then, Hetal points out. Given Labour’s win appears to have been priced into markets for some time, Justin doesn’t believe there will be any lasting effect on yields. Yet on a medium to long-term outlook, gilts look attractive, he adds.

“Interest rates are higher than they’ve been in years – even if the Bank of England soon makes a cut. With high rates comes increased bond yields which offer a greater level of income for bondholders creating, in our view, a favourable environment for bond investors into the second-half of 2024 and beyond.”

SJP Approved 04/07/2024