What a new Labour government means for UK investment

• Labour’s huge victory in Thursday’s UK election will see it take control of the country after more than a decade of leadership from the Conservative Party.
• The move comes at a time when economic uncertainty still prevails in the country, with the effects of higher inflation still being felt and interest rates remaining high.
• Stock markets and real estate and real estate are most likely to be affected, while bond and currency markets are unlikely to be as badly affected, experts said.

Overview of Bishopsgate in the City of London, the capital’s financial district. The UK economy is said to have seen faster growth than initially estimated by early 2024.

Vuk Valcic | Sopa Images | Lightrocket | Getty Images

Britain’s Labour Party won a landslide victory in Thursday’s election and is now poised to take over power from the Conservatives after 14 years as economic uncertainty continues to grip the country.

The UK’s FTSE 100 index rose 0.4% as investors reacted to the election results on Friday, while the British pound made only modest gains. The FTSE 350 index of household goods and housebuilding rose about 1%. Looking at individual stocks within the sector, Khaki shares rose 2.9%, while Taylor Wimpey, Barratt Developments It is Bell Path rose by about 2%.

Interest rates remain elevated in the UK as the central bank battles high inflation following the Covid-19 slowdown. The two main political parties ran on different economic and financial manifestos during the election campaign, which is likely to have different consequences for the investment environment.

Labour’s pledge, for example, to raise taxes on the pay paid to private equity fund managers has raised some eyebrows and led to questions about what this might mean more broadly.

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

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

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

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

James McManus, chief investment officer at Nutmeg, meanwhile, told CNBC that for the most part, “markets don’t really care” about elections. “Historical data shows us that elections and their outcomes rarely move markets when the expected outcome is delivered.”

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

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

In recent years, the UK political landscape has been characterised by frequent changes of leadership, which has sometimes led to market turmoil — especially under the former PM Liz Truss’s brief tenure as Prime Minister.

Some sectors — and therefore specific stocks — could also be affected, Streeter noted. Pressure could be added to the utilities sector, as Labour plans to increase fines for water companies that are already being burdened by high costs. Meanwhile, the party’s pledge to increase the country’s defense budget could see UK aerospace stocks benefit from additional spending on new technology and equipment.

Plans from all parties to build more homes could impact the housing and real estate sector, Richard Donnell, executive director of research at Zoopla, told CNBC.

“Investors would welcome this focus on housebuilding,” he said. “What investors want is more focus on housing and delivering the homes the nation needs and leveraging as much private investment as possible to create an attractive investment for further 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 noted.

Broader economic developments will also be a factor, according to Nutmeg’s McManus. As interest rates are expected to fall, mortgage rates will also fall, which could prompt more people to buy or sell 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 restore mandatory housebuilding targets would be a “quick win” for the sector, which should boost planning and supply.

RBC’s head of European capital goods research told CNBC’s Silvia Amaro on Friday that he agreed the homebuilding sector was likely to be a big beneficiary of Labor’s landslide victory.

“It’s the bottom line, great for housebuilders, great for the wider building materials sector, bricks,” said Mark Fielding, pointing to two motivating factors. “Two big factors: firstly, a return to mandatory housebuilding targets, supporting 1.5 million new homes over the next five years, which would be very positive, and secondly, hopes for planning reforms to do that.”

This in turn will allow for faster planning processes and potentially further intervention from central government to push through more House approvals, according to Fielding, who noted that otherwise investors’ focus will now be on Labour’s ability to deliver broader economic growth.

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

Strategists and economists predict the British pound will not be heavily impacted by the election.

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

“For EUR/GBP, this then means turning attention to the election on the other side of the channel [in France]and then the upcoming UK data in mid-July which will determine whether the BoE will be able to pull the trigger for a first rate cut in early August,” they said.

In the long term, there are also no “major risks” to the pound under a Labour government, Francesco Pesole, currency strategist at ING, told CNBC. Possible renegotiations of Brexit agreements would, at the very least, be more pro-growth under Labor, and the risks of government overspending are also low, he explained.

But the pound could still be headed for a rough patch, Pesole suggested.

“We see the pound depreciating against the euro over the next 24 months mainly because of our view of larger cuts from the Bank of England compared to the ECB,” he said. Higher taxes in the U.K. could also weaken its currency — but that would likely happen regardless of the election outcome, according to Pesole.

Bond markets have so far not appeared reactive to potential new Labour policies, Hargreaves Lansdown’s Streeter said in a second note published earlier this week.

During the campaign, Labor economic spokeswoman Rachel Reeves suggested there could be changes to government borrowing rules in an effort to boost growth and investment. But the bond market’s focus appears to be elsewhere, Streeter said.

“So far, this does not appear to have disrupted debt markets, with bond investors appearing more sensitive to interest rate speculation than to the investment plans of a new government,” she said.

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

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