- A landslide victory for the Labour Party in Thursday’s UK general election would put it in power in Britain after more than a decade of Conservative leadership.
- The change comes at a time when economic uncertainty remains widespread in the country, with the effects of high inflation still being felt and interest rates remaining elevated.
- Experts said the stock market and the real estate and housing sectors were likely to be the most affected, while the bond and currency markets would be less affected.
A panoramic view of Bishopsgate in the City of London’s financial district. The UK economy is reportedly growing faster than originally expected for early 2024.
Vuk Valcic | Sopa Images | Lightrocket | Getty Images
Britain’s Labour Party won a landslide victory in Thursday’s general election, taking over from the Conservatives in power for the first time in 14 years amid continued economic uncertainty in the country.
Britain’s FTSE 100 index was up 25 points at 8,262 at the start of Friday morning trading, while the British pound was only slightly stronger. The pound was little changed overnight on Thursday but was up 0.06% and 0.03% against the US dollar and euro, respectively, as of 6:28 a.m. London time.
Interest rates remain high in Britain as the central bank battles high inflation following the economic slowdown caused by the coronavirus pandemic.
The two major parties have put forward different economic and monetary policies during the election campaign, which are likely to have different effects on the investment environment.
For example, Labour’s pledge to increase tax on the fees received by private equity fund managers has raised some eyebrows and led to questions about what this means in a wider sense.
In interviews with CNBC, a selection of experts shared their views on the impact the change of government may have on UK investment.
Experts said the stock market as a whole is unlikely to react significantly to the election results, but some individual stocks and sectors could be affected.
“The truth about elections is that, most of the time, markets don’t really care,” James McManus, chief investment officer at Nutmeg, told CNBC. “Historical data shows that elections and their outcomes rarely move markets, when they turn out as expected.”
Susanna Streeter, head of finance and markets at Hargreaves Lansdown, largely echoed McManus’ comments in a note this week, but added that there could be some repercussions for the economy.
“A Labour victory in the UK, as is widely expected, could usher in a more stable era for the UK. This should lead to stronger investor sentiment towards the UK,” she said.
Britain’s political landscape in recent years has been marked by frequent changes in leadership, which at times led to market turmoil, particularly during former Prime Minister Liz Truss’s brief tenure.
Streeter noted that some sectors, and therefore certain stocks, could also be affected. Labour plans to increase fines on water companies, already squeezed by high costs, which could put further pressure on the public works sector. Meanwhile, the party has pledged to increase the country’s defence budget, and UK airspace stocks could benefit from extra spending on new technology and equipment.
Richard Donnell, executive director of research at Zoopla, told CNBC that housebuilding plans from all political parties could have an impact on the real estate and housing sector.
“Investors will welcome this focus on housebuilding,” he said. “What they want is more focus on housing, providing the people with the homes they need, leveraging as much private investment as possible to create attractive investment for more capital and support the ambitions of the new government.”
Hargreaves Lansdown said Labour’s plans for affordable new home construction could also boost some housebuilding stocks.
But broader economic developments will also be a factor, according to Nutmeg’s McManus. Lower interest rates could lead to lower mortgage rates, encouraging more people to buy and sell homes, he said, adding that this could have a ripple effect on other businesses such as furniture stores and DIY shops.
RBC’s head of European capital goods research told CNBC’s Silvia Amaro on Friday that the homebuilding sector would be a big beneficiary of a Labor landslide victory.
“This is great on the front line for housebuilders and for the wider building materials sector, for bricks,” said Mark Fielding, pointing to two driving factors. “The two big ones are, firstly, the return to the mandatory housebuilding target of supporting 1.5 million new homes over the next five years, which will be a big positive, and secondly, the hopes of planning reform and getting that off the ground.”
Fielding said this would speed up the planning process and allow central government to step in further to approve more homes, but he said investors’ focus would otherwise be narrowed on Labor’s ability to deliver broad-based economic growth.
“Ultimately, UK banking stocks are one of the best indicators of UK economic growth,” he said.
Strategists and economists predict that the British pound will not be significantly affected by the election.
Deutsche Bank strategist Shreyas Gopal and senior economist Sanjay Raja said in a note on Wednesday that if the outcome is as expected, attention will quickly shift away from the UK election.
“For EUR/GBP, this means attention will turn to the election across the Channel. [in France]And UK data in mid-July will determine whether the BoE can implement its first rate cut in early August,” they said.
Francesco Pesole, a currency strategist at ING, told CNBC that in the long term, there are “no big risks” to the pound under a Labour government, where a renegotiation of the Brexit deal could actually be beneficial for economic growth and the risk of government overspending is lower, he explained.
But Pesole suggested the pound could still be heading for tough times.
“We expect the pound to weaken against the euro over the next 24 months as we expect the Bank of England to cut interest rates more than the European Central Bank,” Pessole said. Tax increases in Britain could also weaken the currency, but they are likely to go ahead regardless of the election outcome, Pessole said.
In a second note published earlier this week, Hargreaves Lansdown’s Streeter said the bond market did not appear to be reacting so far to potential new policies under a Labour government.
During the election campaign, Labor’s economic spokeswoman Rachel Reeves suggested the government could change borrowing rules to boost growth and investment, but Streeter said the bond market’s focus appeared to be elsewhere.
“So far, the bond market doesn’t seem to be fazed. Bond investors appear to be more sensitive to interest rate speculation than to the new administration’s investment plans,” she said.
