What does Labour's victory mean for investors?

The last time Labour took office from the Conservatives was in 1997 when incoming Prime Minister Tony Blair won by a 179 majority. Labour leader Sir Keir Starmer has achieved a similarly dominant result. However, unlike in 1997 when the UK was enjoying a period of ‘Cool Britannia’ Starmer faces some tough challenges.

The initial reaction from the UK stock market has been muted with the MSCI UK, an index of the country’s largest listed companies, up 0.20%¹ at the time of writing. This shouldn’t come as a surprise as investors were prepared for the result and have been more focused on other factors, which drive markets such as interest rate expectations and economic growth forecasts.

With a sizeable majority this Labour government should bring stability to the political landscape, which will allow them to prioritise economic growth. Although investors should remember barely weeks after his election victory in December 2019, Boris Johnson had to deal with the Covid pandemic which significantly impacted his leadership and plans.

Labour may well have inherited a fortunate situation. The impact of Covid lockdowns and the energy price shock we saw in 2022 are fading away.  With inflation coming down, the incoming government may also soon benefit from interest rate cuts and increases in real wages from households. All of this could boost sentiment and help drive economic growth.

However, the true impact on the economy and financial markets may take longer to realise and there is no need for this government to rush into any decisions. Political policies can take time to impact the economy and stock markets.

Rachel Reeves, who is expected to be Chancellor of the Exchequer, is focused on delivering ‘broad-based and resilient growth.’ She and the Labour Party want political and economic stability to drive growth and will aim at achieving this through providing strategic direction, selective policy intervention and close partnerships.

This approach, which Rachel Reeves has dubbed Securonomics, is similar to the ‘Bidenomics’ policy adopted in the US and should encourage companies to invest. We look at this and other reforms in our piece ‘Labour wants Bidenomics for Britain.’

The incoming Labour government could build bridges with the European Union (EU) especially as Labour has less Eurosceptic members in its party. Whilst they might struggle to renegotiate the existing trade deal, there is an opportunity for a closer, friendlier, relationship with the EU that may help to reverse the ‘Brexit’ discount this country’s stock market has experienced as well as improve sentiment.

The pound has been weak following Brexit, particularly against the US dollar. With the potential for Labour to have closer ties with the EU we think this could reverse the current trend and strengthen the pound. For more you can read our article ‘Get ready for a sterling revival under Labour.’

In the short term, there is the potential that a new leadership brings fresh hope and optimism to the UK, and this could be reflected in the stock market. Whilst sentiment could help, Starmer’s Labour government has its work cut out to boost the economy and stimulate investment in UK businesses.

Whether Labour’s policies can improve the investment landscape over the medium and longer term will be determined over time.  In the meantime, our base case for UK equities over the next 10 year is for a total return of 5.6% per annum, although we would point out that valuations do remain attractive compared to other regions.