The Labour party’s historic landslide win will not come as a surprise to most observers. Sir Keir Starmer, the new UK Prime Minister, is headed for a House of Commons majority of 168 seats at the time of writing, just shy of Tony Blair’s New Labour victory in 1997. The Conservative Party suffered its worst-ever electoral result, being decimated by Nigel Farage’s populist Reform UK party, which split the right-wing vote. The centrist Liberal Democrat party has also recorded a record modern-era seat record, with the Scottish National Party being dealt a hammer blow by Labour, ending any ideological pursuits of securing independence. Sir Keir Starmer is expected to appoint his cabinet throughout Friday, likely starting with the most senior ministerial roles in the Treasury, Home Office and Foreign Office, with outgoing prime minster Rishi Sunak expected to stand down later today.
The culmination of a long period of chaotic government from the Conservative party, an equally shambolic election campaign and broader dissatisfaction amongst the electorate has led to a huge Labour majority and one of the biggest swings in a single Parliament. That the electorate in the UK is dissatisfied reflects a broader mood in the west after a period of low growth, high inflation and a real terms decline in prosperity. The UK is a notable outlier for directing votes to a traditional party of the left, not the right but the high vote share for Reform alludes to voter concerns about the impact of high levels of immigration, even if it only converted those votes into a handful of seats.
The current Labour party is occupying a centrist platform, and the perception of policy paralysis is set to move behind us. However, the fact that we now have a government with a historic majority that will be held to account by the more extreme left-wing elements within its own backbench ranks is concerning. The Labour agenda is modestly pro-growth, but crucially with a likely cautious fiscal approach. Little is known about the details of Labour’s approach to fiscal policy, and this is unlikely to change immediately following the election result. We expect to see changes to the tax code, not least for capital gains tax to increase and exemptions to be lowered or removed. Our concern however is that the tax changes will go much further during the course of this Parliament and see changes to income and inheritance taxes. It will be important to maximise the use of all the tax efficiencies available today – this means utilising the full ISA subscription, making the full pension contributions that are available and using the existing dividend, interest and capital gains exemptions where possible.
In terms of the outlook for markets, the UK market has already experienced some improvement in sentiment, which may well reflect the start of a period of greater certainty, a clearer mandate and limited political disruption for the foreseeable future. Labour have sought to reassure businesses by ruling out corporation tax increases and it is notable that more domestically focused companies have tended to perform better once the Bank of England starts easing interest rates and against the backdrop of improving momentum in domestic activity. In terms of key policies, Labour’s Green Prosperity Plan will focus on the country’s climate transition, while focusing on affordable housing. Aside from this, a lack of vision from our new government limits this enthusiasm and it is unlikely that the Labour party can close the UK’s structural budget deficit, particularly with its long run tendency to spend when in power. This in time may weaken sterling and we remain cautious on the outlook for the currency in the light of growing unfunded commitments.
Political and policy stability from a Labour party will also be supportive for the banking sector, particularly as the risks around corporation tax and banking surcharge are absent from the manifesto, as was the case during the 2019 elections. Our new Chancellor, Rachel Reeves, is committed to avoiding a Truss-style bout of market turmoil and will submit all proposals to the Office for Budget Responsibility before any budget. Whilst this is comforting, the fear is that Reeves does better on delivering messages than stimulating positive reform – and talk of nationalising the railways and intention to increase and extend the Energy Profits Levy could weigh on the transportation and energy sectors. There is also the question of how long she will last in the role, with the cohort on the left of her party demanding higher public sector spending commitments.
We hope that a period of better global economic performance can offer the flexibility to accommodate some of Labour’s spending commitments. With a huge majority, continued discipline and mandate to pursue growth, all these things are possible. History guide is that elections have a minimal impact on market performance – we hope this holds true and we expect to be pragmatic on behalf of our clients, as tax rules change and we adapt to the new rules in the most efficient way available.
Please note that the value of investments and the income from them can go down as well as up and you may not receive back all the money invested. Past performance is not a reliable indicator of future results. Any views expressed are those of the author.