By Michael Born, investment research analyst at Morningstar
Markets reacted positively to Labour’s landslide victory in the general election at the start of July, but is this feeling shared by asset allocators eyeing the UK market?
While it’s too early to draw definitive conclusions, there are promising indicators that suggest the UK could become more appealing to asset allocators in the medium to long term.
Economic signals are cautiously positive
Recent UK economic data has shown tentatively positive signs. Real wages are finally starting to improve, inflation has significantly decreased and there are early signals of an earnings recovery for corporates.
Admittedly, the UK is not without its challenges. But if a stable Labour government can begin to deliver on its promise of strong economic performance and with potential rate cuts by the Bank of England on the horizon, the valuations and yields available to investors could make the country an attractive prospect for asset allocators.
Reducing Brexit uncertainty
Brexit remains a major obstacle in the UK’s attractiveness to global investors. The uncertainty surrounding the outcome of Brexit negotiations caused many investors to adopt a wait-and-see approach.
However, whilst they are committed to respecting the Brexit result, Labour are focused on improving the UK’s working relationship with Europe and we could see the government renegotiating more favourable trading terms with our neighbours.
A better working relationship brings hope that the uncertainty overhang will start to dissipate. As well as improving the UK’s international footing, this could install confidence in the UK market.
Restoring government credibility
The past few years have seen an extreme level of political volatility, with chaotic policy making and multiple political scandals having made various governments look incompetent at times.
As a result, the UK’s credibility and strategic direction has taken a hit, on the back of dwindling international relations following the Brexit referendum. These tensions culminated in the market volatility following the mini-budget in 2022.
Having a more disciplined and stable approach to policy, as well as keeping the same ministers in their jobs for more than a year would go some way to improve the relationship between UK corporates and the government and allow them to work better together, as well as making the UK more attractive to investors.
See also: Is a new government the change in narrative UK equities need?
Market beneficiaries
Key beneficiaries of the election result will include housebuilders, the infrastructure supply chain, and UK consumer stocks.
Labour’s plan to build 300,000 new homes a year is a cornerstone of its manifesto. A key part of the strategy to achieving this will be to streamline the approval process, which should be a clear benefit to the larger players who build throughout the country such as Taylor Wimpey, Persimmon and Barratt who have been hampered by the approval process.
Infrastructure and renewable-oriented utilities like SSE should also benefit. Labour have made a much more aggressive commitment to decarbonising the power network than previous governments, and are using infrastructure spending as a catalyst for growth. Likewise, significant plans for infrastructure spending should benefit constructors and developers through the supply chain.
Finally, consumer businesses such as supermarkets and those in the leisure and pub sector should benefit from Labour’s proposed business rates reform as bricks-and-mortar businesses. They should also benefit from life improving for the consumer, with inflation coming down and real wages growing. If we see some political and economic stability resulting in rising consumer confidence, this would likely increase spending and consumption.
Whilst equity markets could be set for a rosy picture, amongst the backdrop of ultra-low valuations and potential M&A activity, we might also see positive signs for bond markets.
Reeves and Starmer have focused on a message of fiscal responsibility, cutting spending as well as likely raising taxes. If we start to see some sensible policy making and political credibility being built at the same time, stronger economic growth would make gilts more attractive over the medium to long term.
A more optimistic outlook
While there are still hurdles to overcome, the potential economic policies of this new Labour government coupled with improving economic indicators and hopefully, a better working relationship with Europe, will create an optimistic outlook for the UK market.
It remains to be seen if these positive trends will continue and if the UK will ultimately become a more attractive destination for investors, but the potential is certainly there.
The next few years will be crucial in determining if Labour’s policies can successfully boost the UK economy and make it a hotspot for investors. So, we will keep an eye on how these developments and see how they unfold and assess whether the new Labour government can truly make the UK more appealing to asset allocators.
See also: How will UK markets be influenced by Rachel Reeves and the Labour Party?
