St. James’s Place comments on the impact of the Labour landslide on investor confidence and UK markets

With the UK election playing out as expected, recent findings from SJP’s investor behaviour election poll indicate that many investors are likely to be waking up with renewed confidence in their investments this morning.

The research, which surveyed 1,000 UK investors following UK election being called, saw almost a third (31%) reporting increased confidence in the UK stock market in response to the impending election, compared to 18% who said their confidence had decreased. Similarly, when looking at people’s confidence in their individual investments, 32% reported increased confidence versus just 13% who said their confidence in their original investments had decreased. 

With this confidence in mind, SJP’s research revealed that 4 in 10 UK investors (38%) were planning to take action on their investment portfolios in response to the election, with 25% intending to increase exposure to equities and 22% to bonds. Meanwhile, 24% planned to diversify internationally by reducing their UK investments, compared to 13% who were looking to increase their investments in the UK market. 

 
 

Commenting on the impact of the election outcome on investor confidence and UK markets, Sarah Ruggins, Head of Investment Specialists at St. James’s Place, said:

“Investors were already reporting increased confidence in markets and their investments in the build up to the election, and today’s result will likely consolidate this. Greater policy certainty going forward should lead to greater confidence in the growth outlook for the UK economy. The new Labour government may be a boon for broader trade relations and since planned policy changes are likely to take time to implement, it’s unlikely we’ll see any immediate negative effects from this election result. While today’s Labour victory may result in a probable short-term uplift for UK shares, it could also have a positive impact on the UK market over the long term, making it more attractive for investments compared to more expensive, developed, potentially overvalued equity markets, such as the US. Over the medium-term, valuations rather than politics will be the primary driver of returns, and, from that perspective, UK equities look attractive.

“Specific market sectors, for example infrastructure and defence, are expected to see a boost over the long term, especially given the pledges in Labour’s manifesto to spend £24 billion on green infrastructure initiatives and aim to reach 2.5% of GDP spending on defence. The energy sector, on the other hand, may experience some volatility until greater clarity is seen with respect to what, if any, windfall tax changes may be implemented. Despite this, it is important to note that these are likely eventual implications rather than any expected immediate impact. In reality, even with a sizeable majority, in the near-term Labour is most likely to be focused on conveying stability. Therefore, we do not anticipate any announcements that would shake markets or have an outsize impact on specific sectors ahead of the Autumn Budget. Greater clarity on policy initiatives will come towards the back of the year as the new Government gets settled.

 
 

“However, Labour is also facing a much tougher macroeconomic backdrop than when they were last in power, with lower growth, higher inflation, as well as a more challenging economic backdrop with a wider deficit, and significantly higher level of debt. Given this fiscal situation, the Government may not be able to borrow or grow its way out of trouble. With most spending cuts likely to be unpalatable to this Government, we are expecting further tax rises of some sort later in the year.

“Overall, it is important that – despite their increased confidence – investors do not get ahead of themselves by making any rash, short term portfolio decisions in response to today’s news. Not only are specific policies still somewhat unclear, but our recent analysis of UK market performance data spanning the past 10 UK elections, from 1987, found no clear trends between election outcome and market performance. Investors should take this on board and adopt a long-term approach to investing, which refrains from trying to time the market, and instead focuses on building a diversified portfolio across asset classes and geographies, tailoring this to meet specific return and risk objectives.”

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