In her first speech after taking office, incoming Chancellor Rachel Reeves said boosting growth is “a national mission” and will be the “guiding light” in Labour’s approach to the economy. After its emphatic General Election victory, it is also promising stability of policy and a business-friendly environment. Does it suggest a stronger era for the UK’s financial markets?
Stability is certainly welcome. The large majority for Labour gives it a strong mandate to enact change and should prevent the flip-flopping on policy that has characterised the previous administration. Chris Clothier, co-CIO and co-manager at CG Asset Management, said that bond, equity and currency markets have reacted with equanimity to the Labour victory, which is the first hurdle.
He adds: “The result is consistent with the polling in the run-up and asset markets have taken the result in their stride. Labour have been at great pains throughout the campaign to paint themselves as a fiscally responsible party. They have also been categorical that they will not increase any of the “big” taxes – VAT, income tax and national insurance.”
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However, the new government needs growth as well as stability and Clothier points out that it faces a grim inheritance: “They are saddled with fiscal challenges at every turn – NHS waiting lists, blood contamination compensation, defence spending, financially stretched universities and local authorities – to name but a few. That is before considering the costs of implementing any progressive policies.”
This makes achieving growth more complicated. The new government has set out a 2.5% growth target. It is hoping that stability and clarity of policy will encourage investment. Reeves has previously said: “Private sector investment is the lifeblood of a successful economy. We need to unlock (it).” Changes to the planning rules and closer ties with Europe are also potential sources of growth, but will take time to negotiate, and to filter through into the real economy.
Reeves will give a Mansion House speech on financial services after the Summer parliamentary recess, but will release greater details on how she plans to bolster investment over the next week. This will give more clarity on the sectors likely to benefit from government support, with housebuilding and green infrastructure in prime position. On the other side, oil companies may be in the firing line. The King’s Speech on 17 July and the Autumn statement will also reveal more of the Government’s plans.
Gilt markets
The gilt market has seen little movement in the wake of the Labour victory. There had been fears that the prospect of more borrowing could push yields higher, but Reeves has done a good job in reassuring investors that there will be no Liz Truss moment for her government.
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Bryn Jones, fixed income fund manager at Rathbones Asset Management, says: “I suspect there won’t be a lot of movement in the gilt market, as the result should be in the price. In the longer term, if Labour is right and it can create growth and borrow less there will be less need for gilt issuance. On a demand vs supply basis that should be good for gilts and the UK’s credit rating. However, if it is wrong, growth is anaemic and the gamble does not pay off, it will have to borrow more. The UK would then be under fiscal strain.”
Clothier adds: “The most troubling resolution would be if Labour seeks to accelerate economic growth by borrowing more today. Given the risks, and an uncertain inflationary outlook, we maintain short duration and prefer index-linked to nominal bonds.”
Equity markets
The election has come at a moment when UK stockmarkets were already starting to see a tentative recovery. UK equities – and smaller companies in particular – have outpaced their international peers over the past three months. It is difficult to attribute this directly to the anticipation of greater political stability, but it may have helped, says Louis Hutchings, portfolio manager at Nedgroup.
“The Labour Party’s victory and significant majority in the UK general election has led to a removal of political uncertainty that has broadly supported UK equities. While substantial economic policy changes are not expected in the immediate future, Labour’s market-friendly stance, particularly with Rachael Reeves as Chancellor, has been reassuring. Reeves, with her Bank of England background, is viewed as a competent and reliable figure.”
He says that following the election, the domestically-focused FTSE 250 has shown notable strength, while the more globally positioned FTSE 100 has remained relatively unchanged.
“Although the outcome was largely anticipated, its confirmation has nonetheless provided a degree of stability and confidence in UK assets.”
There was also a notable bounce in some sectors. Housebuilders, for example, ticked higher on the promise of changes to planning reform.
Paul O’Neill, chief investment officer at Bentley Reid, says markets like certainty and stability above all else: “The election result should be welcome news after a period which gave us Brexit, the gilt crisis and the Scottish referendum. As expected, UK equity markets are relatively benign on this much-anticipated Labour victory, especially as the US was closed on Thursday for 4th July and many will be taking it as an opportunity for a long weekend.”
However, O’Neill says in the longer term, other factors will make the difference: “Longer term, election results are quickly discounted, especially where the choices are really between policies that are far more closely aligned than the parties would have us believe. Polarisation makes for good headlines, but today is not really that different from yesterday. Yes, the UK faces significant fiscal and growth challenges, but post-election calm and a stock market that is cheap on both an absolute and relative basis should mean that the recent improvement in sentiment towards the UK economy as a whole continues.”
The UK currency was unmoved by the election result. Jones says: “With France under political pressure from far right, and the US presidential election unconvincing so far, then the UK might start to look like the best of a bad bunch.”
If the Labour government can deliver the stability it promises, it could prompt a reappraisal of UK assets by domestic and international investors, who have been deterred by an unstable business environment and variable policy. It is too early to ring the bell on a new era for UK assets, but the incoming government is making the right noises for investors.
