Written by Richard Flax, Chief Investment Officer at Moneyfarm
It’s currently tough to imagine anything other than a large Labour majority. Given that seems a consensus view, you’d think that the immediate financial market reaction on the result should be relatively muted.
As we look out beyond the immediate election result, there are a few points to consider.
First, the prospect of a large majority for a “centrist” (depending on your perspective) government could be a welcome relief after election results we’ve seen elsewhere. That could increase the appeal of UK assets particularly after an extended period of uncertainty under previous Prime Ministers.
Second, with the election out of the way, Labour will now have to govern. It’s well understood that the circumstances are challenging – the combination of a high tax burden, deteriorating public services and a lack of capital investment is a difficult mix. The likely future Chancellor, Rachel Reeves, has argued that faster growth is the answer – and that’s a fair statement during an election campaign. How you actually achieve faster economic growth is a harder question to answer. It doesn’t happen overnight. The incoming government will hope that lower inflation and lower interest rates will provide a cyclical tailwind. That will improve confidence and give the government some breathing room to implement their policies.
But in all likelihood, Starmer and Reeves will look to raise taxes, even if that’s something that won’t be particularly appealing to investors. Increasing capital gains tax and inheritance tax are two likely candidates. This would likely raise additional revenue and provide some succour to the left wing of the Labour party that is eager for greater redistribution. They’ll claim that the situation is much worse than they had realised. It’s a nice jab at the Tories, but the state of the UK economy is pretty well documented.
So, there might be a positive story unfolding here. A new, more energetic government with a decent majority that could try to tackle some of the UK’s challenges. At the same time there’s the prospect of lower inflation and lower interest rates possibly helping to re-accelerate the moribund UK economy, at least temporarily. Solving the UKs problems won’t be easy, whoever wins this election, but that’s probably true for most of the developed world. On a relative basis, the UK might look marginally better than it did and that could be positive for UK assets.
