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Labour’s landslide win is set to enhance the attractiveness of UK markets as the prospect of a period of political stability marks the country out from some of its neighbours, investors have said.
UK stocks, bonds and sterling all edged higher on Friday, building on steady gains since Rishi Sunak’s surprise decision to call a snap election in late May. The pound is the only member of the G10 group of major currencies to rise against the dollar so far this year.
Analysts point to a growing belief among investors that Sir Keir Starmer’s resounding win draws a line under a tumultuous period under the Conservatives, and should burnish the appeal of UK assets as elections in the US and in European countries including France unnerve investors.
“With political turmoil hitting other developed economies at the same time, this huge majority may present the UK to investors as somewhat of a political safe haven — a known quantity that should give businesses confidence in the environment they operate in,” said Lindsay James, an investment strategist at Quilter Investors.
Cautious optimism in UK markets stands in contrast to France, where the rise of the far right has spooked investors and dragged the Cac 40 stock index down almost 4 per cent since President Emmanuel Macron’s shock decision on June 9 to call an election. The yield premium on French debt over Germany surged to levels not seen since the Eurozone debt crisis last week before voters went to the polls.
Investors are hopeful that Labour’s promise to overhaul the UK’s planning system could give the UK economy a boost and lift stocks, which have lagged behind their US and European rivals over the past decade.
“A period of relative political stability could brighten beaten-down sentiment for UK assets — particularly among foreign investors,” said Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute, adding that the substantial majority increased the likelihood of a two-term government, enabling long-term policy implementation including planning reform.
Bond investors also say the incoming government’s cautious borrowing plans should help to attract foreign buyers to gilts, less than two years after Liz Truss’s short-lived administration sparked a market panic with its unfunded tax cuts.
“A re-rating is merited and would be a big turnaround after the volatility seen during the years of UK political uncertainty that started with Brexit in 2016 and continued through Liz Truss’s short tenure,” said Monica Defend of Amundi, Europe’s largest asset manager.
The relative stability of gilts also contrasts with recent swings in the US Treasury market, sparked by the growing prospect of a second Donald Trump presidency after Joe Biden’s disastrous debate performance last week.
Trump has proposed tax cuts and high tariffs on imports from China, prompting warnings from analysts this could add to inflationary pressures and worsen the US’s yawning fiscal deficit.
Despite its new-found reputation as a pocket of relative calm, Labour faces an uphill battle to deliver its plans with tight borrowing constraints and the Bank of England forecasting the economy will grow only 0.5 per cent this year.
Rachel Reeves, who is set to become chancellor, has promised to retain the Conservative government’s commitment that debt as a proportion of GDP must be on track to fall in five years. Meanwhile, her tax-raising plans amount to just £8.6bn, equal to 0.8 per cent of the tax take in the last financial year.
Speaking after retaining her seat of Leeds West and Pudsey on Friday morning, Reeves promised to “end the chaos” she claimed had prevailed under the Tories and to “restore the stability that Britain has sorely lacked for too long”.
Without much room for extra borrowing, Labour will have to focus on “supply-side” reforms such as efforts to stimulate investment in order to raise the UK’s anaemic productivity growth, according to Pimco economist Peder Beck-Friis.
“A softer stance towards the European Union might marginally improve growth prospects, but it is uncertain how much the EU would co-operate,” he said.
Some investors remain sceptical of how Starmer will be able to meet his promises without tapping bond markets or taxpayers for more cash.
“You’ve got an economy with poor growth and they are making pledges on how they will resolve the NHS, spending on Nato and education,” said Craig Inches, head of rates at Royal London Asset Management. “I do find it difficult to see how they are going to pay for it.”
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