Here’s what a new Labour government means for UK investment – ​​NBC New York

Here’s what a new Labour government means for UK investment – ​​NBC New York

Here’s what a new Labour government means for UK investment – ​​NBC New York

  • The Labour Party’s big win in Thursday’s UK election will allow it to take over the country after more than a decade of Conservative leadership.
  • The change comes at a time when economic uncertainty is still present in the country, with the effects of higher inflation still being felt and interest rates remaining high.
  • Stock markets and real estate and housing are the most likely to be affected, while bond and currency markets are unlikely to be affected as much, experts said.
General view of Bishopsgate in the City of London, the capital's financial district. The UK economy has reportedly seen faster growth than initially estimated in early 2024.
Vuk Valcic | Soup Images | Lightrocket | Getty Images

General view of Bishopsgate in the City of London, the capital’s financial district. The UK economy has reportedly seen faster growth than initially estimated in early 2024.

Britain’s Labour Party scored a big victory in Thursday’s election and is now set to replace the Conservatives after 14 years, at a time when economic uncertainty still looms large in the country.

The UK’s FTSE 100 index rose 0.4% following investor reaction to Friday’s election results, while sterling posted only modest gains. The FTSE 350 index of household goods and housebuilding rose around 1%. Looking at individual stocks in the sector, Persimmon rose 2.9%, while Taylor Wimpey, Barratt Developments and Bellway all rose around 2%.

Interest rates remain elevated in the UK as the central bank has battled high inflation following the slowdown caused by Covid-19. The two main political parties presented different economic and financial manifestos during the election campaign, which will likely have different consequences for the investment environment.

Labour’s promise, for example, to raise taxes on private equity fund managers’ remuneration raised questions and raised questions about what this might mean more broadly.

Speaking to CNBC, a selection of experts discuss the potential impact that the change of government could have on investment in the UK.

Stock markets

The arrival of a new Labour government has not yet moved the markets much, but analysts expect UK assets to become more attractive from now on.

In a note on Friday, Jefferies analysts said that despite concerns raised by the strong performance of the right-wing Reform UK Party, a victory for the Labour Party in the UK election would help the country appear “relatively stable.”

This, combined with regulatory reform, “could increase the attractiveness of UK assets,” Jefferies analysts wrote in a research note.

Meanwhile, James McManus, chief investment officer at Nutmeg, told CNBC that the vast majority 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 occurs.”

Susannah Streeter, director of money and markets at Hargreaves Lansdown, echoed McManus’ comments in a note published this week, but added that there could be some impact on the economy.

“A widely predicted Labour victory in the UK could usher in an era of greater stability for the country… which should help bolster investor sentiment towards the UK,” he said.

In recent years, the UK political landscape has been characterised by frequent leadership changes, which have sometimes caused market turbulence, especially during the brief tenure of former Prime Minister Liz Truss.

Some sectors – and therefore specific stocks – could also be affected, Streeter noted. Pressure could mount in the utilities sector, with Labour planning to increase fines for water companies already suffering from high costs. Meanwhile, the party’s pledge to boost the country’s defence budget could see UK aerospace stocks benefit from extra spending on new technology and equipment.

Real estate markets and housing

Plans by all parties to build more houses could impact the housing and property sector, Richard Donnell, executive director of research at Zoopla, told CNBC.

“Investors would welcome more attention to housing construction,” he said. “What they want is more attention to housing and delivering the homes the country needs, as well as attracting as much private investment as possible to create an attractive investment for more capital and support the ambitions of the new government.”

Some housebuilding stocks could also see a boost from Labour’s plans to build new, affordable homes, Hargreaves Lansdown said.

However, according to Nutmeg’s McManus, wider economic developments will also be a factor. As interest rates fall, so will mortgage rates, which could lead to more people buying or selling homes, he said, adding that this could also have knock-on effects for 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 that should boost planning and supply.

RBC’s head of European capital goods research told CNBC’s Silvia Amaro on Friday that he agrees that the homebuilding sector will be one of the main beneficiaries of the Labor Party’s landslide victory.

“It’s a big step forward for housebuilders and for the building materials sector in general, the bricks sector,” said Mark Fielding, pointing to two driving factors. “Two important factors: firstly, the return to mandatory housebuilding targets, which would support the construction of 1.5 million new homes over the next five years, which would be very positive, and secondly, the hopes for planning reforms, with the aim of achieving this.”

That in turn will allow for faster planning processes and potentially additional central government intervention to push more approvals through the House, according to Fielding, who noted that otherwise investors’ focus will now be limited to Labor’s ability to deliver broader economic growth.

“British bank stocks are, in the end, one of the biggest indicators of UK economic growth,” he said.

The pound sterling

Strategists and economists predict that the pound will not be strongly affected by the elections.

If the results are as expected, attention will quickly shift away from the U.K. election, said Shreyas Gopal, a strategist, and Sanjay Raja, a senior economist at Deutsche Bank, in a note published Wednesday.

“For EUR/GBP, this means focusing on the elections across the Channel (in France) and then on upcoming UK data in mid-July which will determine whether the BoE can pull the trigger for a first rate cut in early August,” they said.

In the longer term, there are also “no major risks” to the pound under a Labour government, Francesco Pesole, a currency strategist at ING, told CNBC. Potential renegotiations of the Brexit deals would, if anything, be more growth-friendly under a Labour government, and the risks of excessive government spending are also low, he said.

But the pound could still be headed for a difficult period, Pesole suggested.

“We think the pound will depreciate against the euro over the next 24 months, mainly due to our view that the Bank of England will implement larger cuts compared to the ECB,” he said. A tax increase in the UK could also weaken its currency, but that would likely happen regardless of the election outcome, according to Pesole.

Bond markets

Bond markets have so far appeared unreactive to potential new Labour policies, Hargreaves Lansdown’s Streeter said in a second note published earlier this week.

During the campaign, Labour’s economic spokeswoman Rachel Reeves suggested that changes to government borrowing rules could be introduced in an effort to boost growth and investment. But the bond market appears to be focused on something else, Streeter said.

“So far, this does not seem to have unsettled debt markets, and bond investors appear to be more sensitive to speculation about interest rates than to the investment plans of an incoming government,” he said.

—CNBC’s Ryan Browne and Ruxandra Iordache contributed to this article.