- Labour’s landslide victory in Thursday’s British election will see it take control of the country after more than a decade of Conservative Party leadership.
- The move comes at a time when economic uncertainty continues to linger in the country, with the effects of higher inflation still being felt and interest rates remaining high.
- Stock markets and the real estate and housing sector are most likely to be affected, while bond and currency markets are not expected to be affected as much, experts said.
A general view of Bishopsgate in the City of London, the capital’s financial district. The UK economy is expected to grow faster than expected in early 2024.
Vuk Valcic | Images of Sopa | Lightrocket | Getty Images
Britain’s Labour Party won a landslide victory in Thursday’s general election and is now set to take over from the Conservatives after 14 years, at a time when economic uncertainty continues to plague the country.
The UK’s FTSE 100 index rose 0.4% as investors reacted to Friday’s election results, while sterling made only modest gains. The FTSE 350 index of household goods and housebuilding rose around 1%. Looking at individual stocks in the sector, Persimmon shares rose 2.9%, while Taylor Wimpey, Barratt Developments and Bellway all gained around 2%.
Interest rates remain high in the UK as the central bank grapples with high inflation following the Covid-19 economic slowdown. The two main political parties campaigned on different economic and financial agendas, which would likely have different implications for the investment environment.
Labour’s pledge, for example, to raise taxes on the remuneration received by private equity fund managers has raised some eyebrows and prompted questions about what it might mean more broadly.
Speaking to CNBC, a selection of experts assessed the potential impact the change in government could have on investment in the UK.
The arrival of a new Labour government has not yet shaken markets much, but analysts expect British assets to become more attractive from now on.
In a note published on Friday, Jefferies analysts said that despite concerns over the strong performance of the right-wing British Reform Party, a Labour victory in the British election would help make the UK appear “relatively stable”.
This, combined with regulatory reform, “could increase the attractiveness of UK assets,” Jefferies analysts wrote in a research note.
James McManus, chief investment officer at Nutmeg, told CNBC that most of the time, “markets don’t really care” about elections. “Historical data shows us that elections and their outcomes rarely move markets when the expected outcome is achieved.”
Susannah Streeter, head of financial markets at Hargreaves Lansdown, largely echoed McManus’ comments in a note published this week, but added there could be some impact on the economy.
“A widely predicted Labour Party victory in the UK could usher in an era of greater stability for the UK… which should help to strengthen investor sentiment towards the UK,” she said.
In recent years, the British political landscape has been characterised by frequent changes in leadership, which have sometimes led to market turbulence, particularly during the brief tenure of former Prime Minister Liz Truss.
Some sectors – and therefore specific stocks – could also be hit, Streeter said. Pressure could increase on the utilities sector, as Labour plans to increase fines on water companies, which are already burdened by high costs. Meanwhile, the party’s pledge to increase the country’s defence budget could see UK airspace stocks benefit from additional spending on new technology and equipment.
Plans from all parties to build more homes could have an impact on the real estate and housing sector, Richard Donnell, executive director of research at Zoopla, told CNBC.
“Investors will welcome this focus on housing,” he said. “What investors want is to focus more on housing and delivering the homes that the country needs, and to leverage as much private investment as possible to create an attractive investment for more capital and to support the ambitions of the new government.”
Some sectors of housebuilding could also see a boost due to Labour’s plans to build new affordable housing, Hargreaves Lansdown noted.
Nutmeg’s McManus said general economic developments would also be a factor. Interest rates are expected to fall, as are mortgage rates, which could encourage more people to buy or sell homes, he said, adding that this could also impact other businesses such as furniture and DIY stores.
Aynsley Lammin, equity analyst at Investec, said Labour’s plan to reinstate mandatory housebuilding targets would be a “quick win” for the sector, which should boost planning and supply.
RBC’s head of European capital goods research told CNBC’s Silvia Amaro on Friday that the homebuilding sector was likely to be one of the main beneficiaries of Labor’s landslide victory.
“This is great news for housebuilders, and for the wider building materials sector, brick,” said Mark Fielding, highlighting two key factors. “Two important factors: firstly, a return to mandatory housebuilding targets, which would see 1.5 million new homes built over the next five years, which would be very positive, and secondly, hopes for planning reforms to help deliver that.”
This in turn will allow for faster planning processes and potentially further central government intervention to push forward approval of more housing projects, according to Fielding, who noted that investor attention would now focus on Labour’s ability to deliver broader economic growth.
“The actions of UK banks are ultimately one of the most important indicators of UK economic growth,” he said.
Strategists and economists predict that the pound will not be significantly impacted by the election.
If the results are as expected, attention will quickly shift away from the British election, Deutsche Bank strategist Shreyas Gopal and senior economist Sanjay Raja said in a note published Wednesday.
“For EUR/GBP, this then means turning attention to the elections across the Channel (in France) and then to the next UK data in mid-July which will determine whether the BoE is able to pull the trigger on a first rate cut in early August,” they 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 be, at best, more growth-friendly under a Labour government, and the risks of excessive government spending are also low, he explained.
But sterling could still face a difficult period, Pesole suggested.
“We expect sterling to depreciate against the euro over the next 24 months, mainly because of our expectation of deeper rate cuts from the Bank of England than from the ECB,” he said. Higher taxes in the UK could also weaken its currency, but that would likely happen regardless of the election result, Pesole said.
Bond markets do not appear to be responsive to potential new policies from Labour so far, Hargreaves Lansdown’s Streeter said in a second note published earlier this week.
During the campaign, Labor’s economics spokeswoman Rachel Reeves suggested changes could be made to the government’s borrowing rules to boost growth and investment. But the bond market’s attention appears to be elsewhere, Streeter said.
“So far, this does not appear to have disrupted debt markets, with bond investors appearing to be more sensitive to interest rate speculation than to the investment plans of a new government,” she said.
—CNBC’s Ryan Browne and Ruxandra Iordache contributed to this report.