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As expected, Labour have won their landslide. Given that they have been odds on to do this since the election was called in May the result has been more of a non-event for markets than many elections of the past. That said, there are a few conclusions we can make now the result is in.
First, to state the obvious, investors and businesses prefer a steady political and regulatory framework that they can adjust to and plan under. A large Labour majority looks to provide this for the next five years. I have seen this described as a UK “Dullness Dividend” which, though hardly inspiring, feels about right.
Second, Labour have committed to de-regulate to help investment into infrastructure and housing. To the extent they are able to pull this off, this would clearly be a net positive for the UK economy. This morning the UK focussed FTSE 250 Index is up 1.3% as I type, ahead of all the other major European markets. I’d also expect the new Chancellor to borrow and hope for growth at her first budget in the autumn rather than commit to the Tories rather tighter spending restrictions. As I’ve written plenty of times here before, UK equites are trading cheaply relative to their longer term history. If Labour are to deliver any part of their more pro-business, pro-growth agenda there is upside potential today in many parts of the UK market.
That said, more Labour borrowing makes the story for interest rates and government bond returns more nuanced. A growth focus and more debt issuance should push interest rates higher than they would otherwise have been, but there are a couple of important caveats here. First, much of this is already in the price. Markets started the year expecting 7 interest rate cuts in the UK in 2024. Now we are down to 2. Part of the reason for this has been the fact that economic growth has stayed stronger than many, including the Bank of England, have expected. It has been clear all year that the next government would most likely be a Labour one. Bond markets have barely reacted to the election result this morning and UK government bonds are in fact up a bit (with yields down) as I type. I’d expect government bond markets to continue to be much more sensitive to continued progress on inflation than they are to UK government policy for the rest of the year.
We continue to think the big political news for markets will come out of the US. Trump is (ironically) similar to Labour in being, at the margin, good news for US equity markets and bad news for government bonds, but his proposed 10% tariffs on all imports will hurt European based exporters. This tempers our enthusiasm to up our UK equity allocation today. If Trump does prevail in November there should be better opportunities to make a switch back into UK assets (if we indeed want to then) later in the year.
Finally, one question I have had for the last few years is where are all the young Conservative voters? The answer in part seems to be they are voting Reform. Below (via JLPartners and Deutsche Bank) is some polling which shows voting intentions for 16 and 17 year olds (too young to vote of course but this should reflect younger voters in general). As we have also seen in France, young people are more drawn to the extreme ends of the political spectrum. What is interesting to me is just how divided boys and girls are. Young males are as likely to vote Reform as they are Labour. For girls, the second most popular party is the Greens and not a single person in the survey said they would vote Tory. The challenge for the Conservatives over the next 5 years is to rebuild a coalition of the right after Reform split their vote this time round. Getting some of sort of youth vote going again looks like it should be a key part of that strategy.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
