- The Labour Party’s landslide victory in Thursday’s British election means it takes power in the country after more than a decade under the leadership of the Conservative Party.
- The change comes at a time when there is still a lot of economic uncertainty in the country, the effects of higher inflation are still being felt and interest rates remain high.
- Experts say stock markets and real estate and housing will be hit the hardest, while bond and currency markets are unlikely to be hit as hard.
General view of Bishopsgate in the City of London, the capital’s financial district. The UK economy is said to have grown faster than initially estimated in early 2024.
Vuk Valcic | Sopa Images | Lightrocket | Getty Images
Britain’s Labour Party secured a landslide victory in Thursday’s election, taking over from the Conservatives after 14 years as economic uncertainty continues to plague the country.
Britain’s FTSE 100 index rose 25 points to 8,262 on Friday morning, with the British pound posting only slight gains. The currency was up 0.06% and 0.03% respectively against the US dollar and the euro at 6:28 a.m. London time.
UK interest rates remain high as the central bank struggles to cope with high inflation following the Covid-19 slowdown.
The two main political parties ran different economic and financial manifestos during the election campaign, which were likely to have different implications for the investment climate.
The Labour Party’s pledge to increase the tax on the remuneration of private equity fund managers, for example, prompted surprise and questions about what this might mean more broadly.
Speaking to CNBC, a number of experts give their views on the potential impact the change of government could have on UK investment.
Experts say stock markets overall will not react strongly to the election outcome, but some individual stocks and sectors could be affected.
“The truth about elections is that markets don’t care about them in most cases,” James McManus, chief investment officer at Nutmeg, told CNBC. “Historical data shows that elections and their outcomes rarely affect markets if the expected outcome is delivered.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, broadly echoed McManus’ comments in a note published this week, but added that there could be some impact on the economy.
“A Labour victory in the UK, as many predicted, could herald an era of greater stability for the UK… which should boost investor sentiment towards the UK,” she said.
In recent years, the UK political landscape has been characterised by frequent leadership changes, sometimes leading to market turmoil, most notably during the short premiership of former Prime Minister Liz Truss.
Some sectors — and therefore specific stocks — could also be hit, Streeter pointed out. Pressure on the utilities sector could increase with Labour planning to increase fines on water companies, which are already burdened by high costs. Meanwhile, the party’s pledge to boost the country’s defence budget could see Britain’s airspace resources benefit from extra spending on new technology and equipment.
Plans from all parties to build more homes could have implications for the property and housing sectors, Richard Donnell, executive director of research at Zoopla, told CNBC.
“Investors would welcome this focus on housing,” he said. “What investors want is more focus on housing and delivering the homes the country needs and leveraging as much private investment as possible to create an attractive investment environment for more capital and to support the ambitions of the new government.”
Some stocks in the housing sector could also get a boost from Labour’s plans to build new affordable homes, according to Hargreaves Lansdown.
However, Nutmeg’s McManus said broader economic trends will also be a factor. As interest rates fall, mortgage rates will also fall, which could lead to more people buying or selling homes, he said, adding that this could also have a knock-on effect on other businesses such as furniture and DIY stores.
Strategists and economists predict that the election will not have a major impact on the British pound.
If the results are as expected, attention will quickly drift away from the British election, Shreyas Gopal, strategist, and Sanjay Raja, senior economist at Deutsche Bank, said in a note published on Wednesday.
“For EUR/GBP this means that attention needs to be shifted to the elections via the channel [in France]and then the upcoming UK figures in mid-July will determine whether the BoE is able to deliver a first rate cut in early August,” the analysts said.
Longer term, there are also no “huge risks” to the pound under a Labour government, Francesco Pesole, FX strategist at ING, told CNBC. Potential renegotiations of Brexit deals would, if anything, be more pro-growth under Labour, and the risks of excessive government spending are also low, he explained.
But the pound could still be heading for a tough period, Pesole suggested.
“We see the pound falling against the euro over the next 24 months, largely because of our view of greater austerity by the Bank of England compared to the ECB,” he said. Higher taxes in the UK could also weaken the currency, but that would likely come regardless of the election result, Pesole said.
Bond markets appear so far to be unresponsive to potential new policy measures from Labour, Streeter of Hargreaves Lansdown said in a second note published earlier this week.
During the campaign, Labor’s economics spokeswoman Rachel Reeves suggested changes to government borrowing rules could be coming in a bid to boost growth and investment. But the bond market’s focus appears to be elsewhere, Streeter said.
“So far, this does not appear to have caused any disruption in bond markets. Bond investors appear to be more sensitive to interest rate speculation than to the investment plans of a new government,” she said.