A victory in the Labor election will be a “net positive” for financial markets, say strategists at US bank JP Morgan, in an analysis that underlines the appeal of Keir Starmer’s “centrist platform” for the City of London.
A Labor majority would benefit banks, builders and supermarkets, analysts led by JP Morgan’s head of global equity strategy, Mislav Matejka, wrote in a note to clients published on Monday. The US Investment Bank said Labour’s policies would be “modestly growth-enhancing, but crucially with a likely prudent fiscal approach”.
Analysts at MUFG, a Japanese investment bank, said separately that a landslide victory for Labor would be “the most positive for the pound” as it would end political instability, raise expectations of higher government spending and potentially help to herald a more constructive relationship between the two countries. Britain and the EU after Brexit.
According to polls, Starmer is a strong favorite to become the next British Prime Minister. Labour’s turnaround since the 2019 general election has been marked – including the ouster of former leader Jeremy Corbyn and the watering down of previous spending commitments. It also included a concerted, years-long ‘smoked salmon offensive’ by Labor in an attempt to charm big business.
“We believe the impact on the market will be net positive,” they wrote. “The current Labor Party occupies a centrist platform and the perception of policy paralysis is expected to fade behind us.
“The Labor agenda is modestly pro-growth, but critically important with a likely prudent fiscal approach. Our economists believe that given the lack of fiscal space, Labor is likely to focus on supply-side reforms to help improve economic growth.”
More than half of the 268 respondents to a Bloomberg News survey of readers and users of the financial market terminal published on Monday said a Labor victory would be the best outcome for the pound.
MUFG’s Derek Halpenny and Lee Hardman wrote last week that Labour’s spending plans were “unlikely to fuel investor concerns”. They wrote that the party is likely to learn the lesson of the Conservative party under Liz Truss, whose premiership quickly descended into chaos after financial markets became fearful of unfunded tax cuts. The pound fell to an all-time low against the US under Truss at $1.0327, down from $1.27 on Monday.
Labor has pledged to stick to budget rules, including not borrowing to cover day-to-day government spending and reducing net government debt as a share of GDP over a five-year forecast period. Halpenny and Hardman wrote: “There is nothing bold here, no shift in budget frameworks, and Labor is essentially sticking to the same budget constraints that apply now.”
Matthew Ryan, head of market strategy at financial services firm Ebury, wrote on Monday that the prospect of a Labor government “actually boosted the pound” compared to the euro, which has been hit by uncertainty over how much power the far right has. parties will gain control after the European elections and Emmanuel Macron’s decision to call early elections in France.
In general, JP Morgan strategists prefer the domestically focused FTSE 250 stock index of mid-cap companies listed in London over the blue-chip FTSE 100, which has more of an international focus.
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JP Morgan’s assessment of Starmer’s Labor is in stark contrast to its distaste for Corbyn’s policies, including the nationalization of several industries. In 2019, JP Morgan said a Labor government would “weigh heavily” on the minds of foreign investors.
Nevertheless, not all major companies would welcome a Labor government in 2024, JP Morgan said, citing the promised nationalization of the train network and proposals to increase taxes on energy companies. Water utilities are also likely to face stricter regulations, but other utilities could benefit from spending on zero-energy infrastructure.
The pound hit a 22-month high against the euro on Monday after the common currency was hit by Emmanuel Macron’s surprise decision to call early parliamentary elections in France. The pound sterling reached €1.1839 for the first time since August 2022.
Macron’s shock move also hit stocks in Paris, where the CAC 40 index fell more than 2% at one point. Germany’s Dax fell 0.7% in afternoon trading after German Chancellor Olaf Scholz’s coalition suffered losses in the EU elections.
French bond prices also weakened, widening the gap between borrowing costs in Paris and Berlin. France’s 10-year government bond yield (the yield on the bond) rose to 3.22%, the highest since last November, up from 3.115% on Friday evening