Labour has achieved a landslide victory, securing a majority comparable to Tony Blair’s triumph in 1997. This historic moment marks the end of 14 years of Conservative rule, with Keir Starmer becoming the seventh Labour Prime Minister, and only the third since the 1970s.
What does this mean for investors?
Policy stability
The return of stability, along with pension and planning reform, could strengthen investment in the UK after years of instability. The unstable period since 2016 has set a low bar, which the new Government can improve upon.
Abandoned radical policies
Jeremy Corbyn’s radical regulatory plan has been fundamentally discarded, and the global economic outlook is more favorable with falling interest rates.
However, it’s important to note potential financial risks such as:
- Tough fiscal situation: The new Chancellor inherits a tough fiscal situation, with underfunded public services desperately needing investment. Labour’s manifesto lacked detail on addressing this which poses potential risks.
- Tax increases: Rachel Reeves (Chancellor of the Exchequer) might consider raising capital gains and inheritance taxes to meet financial commitments. Therefore, this could negatively impact investment if overdone.
Market implications
Fiscal policy changes
The new Labour Government faces a complex fiscal landscape. While pledging to avoid austerity and prioritise public services, Chancellor Rachel Reeves inherits spending plans with significant cuts to key departments. Her challenge is to improve public services while adhering to fiscal rules and commitments not to raise major taxes.
Bond market implications
The Government’s approach to borrowing will be crucial. Unlike the Truss era, borrowing for public services investment may be more acceptable to markets. Key factors include:
- Averting aggressive public service cuts could benefit long-term growth
- Labour’s promise to independent fiscal scrutiny (OBR) gives reassurance
- Favorable economic context with 2% inflation and potential interest rate cuts
Implications for the stock market
The moderate approach of the current Labour leadership contrasts with the radical pledges of the Corbyn era, providing some reassurance for businesses:
- Regulatory stability: Labour’s regulatory plan is less daunting than previously feared. Nationalising rail providers and creating a state-owned energy supplier are at present underway or planned.
- Policy stability: Reduced policy volatility could be an advantage to the stock market and investment in the UK. Since Brexit, investment in the UK has fallen behind peers, and consistent policies could help undo this trend.
- Pension fund investment: The new Government is expected to push pension funds to invest in UK equities, reversing restrictive legal changes from the 1990s.
These changes, while not instant game-changers, offer reasons for cautious optimism despite the potential for tax increases.
How can we help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Independent financial advisers team. Zoe’s areas of expertise include investment advice, retirement planning, IHT and lifetime cash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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