Written by Matt Evans, Portfolio Manager, UK Sustainable Equities
The UK has suffered from uncertainty and political instability since Brexit. That may begin to improve. UK stocks offer compelling value on a global comparison. As profits begin to rebound, UK politics stabilises and interest rates begin to fall, we see a more favourable outlook for UK companies.
A new political landscape
As the polls predicted, we are waking up to a Labour government to be led by Sir Keir Starmer. With more than 400 seats in parliament, Labour will have a significant majority, likely to be around 170 seats. The Conservatives have suffered significant losses. The Lib Dems have achieved their best result since 1923. At the eighth time of asking, Nigel Farage the Reform UK leader has won a parliamentary seat.
While Labour has a huge parliamentary majority, it is perhaps not the political landside it appears. Indications are that they have taken just 36% of the vote, with a large number of seats won on a slim margin. Therefore, as they progress through their term, the UK’s economic challenges of planning reform, EU alignment, tax reform and public sector productivity will not easily be solved and will depend on potentially controversial trade-offs. Despite this, the ‘Securonomics’ Labour is going for should support stability in the shorter term. Monitoring policy implementation and improving growth will be key to retaining confidence.
What does it mean for the country as a whole?
- Fiscal policy is set to show little change in the early days as Labour has consistently communicated there will be no major tax rises, no significant spending cuts and no slippage from current fiscal rules, all while boosting growth. This will be tough to achieve.
- The first budget could happen in mid-September, but it will more likely come after the Labour Party conference, sometime in October or November. Expectations are for a cautious start. The new government hopes growth will provide the flexibility to spend more over time.
Stock market considerations – Sector impacts
Banking
- The impact on banks appears neutral, with Starmer ruling out further taxes on the banks at present. The risk of an increase in capital gains tax, as well as increased regulation around carried interest, may impact net flows for UK wealth managers. Scrutiny on the insurance sector, such as on car insurance pricing, is likely to remain.
Utilities
- Utilities appear well placed as Labour continues to emphasise the importance of electricity networks and so the required investments should be well supported. The water sector remains in focus and needs significant improvement.
Net zero
- Labour continues to put net zero as a central policy, given its importance to energy security and reducing energy bills. This should be positive for renewables and electricity networks. Labour has identified the oil sector for further taxation. It has previously announced its Green Prosperity Plan, via the creation of a National Wealth Fund and a public body (Great British Energy), funded in part via a windfall tax on energy firms and borrowing. Other policies announced include working with the private sector to double onshore wind, triple solar power and quadruple offshore wind by 2030. It also plans to invest in carbon capture and storage, hydrogen and marine energy, and long-term energy storage.
Residential construction
- Housebuilding has been a central part of Labour’s focus, and a more efficient planning system to drive more housebuilding with an emphasis on affordable homes is a priority. The question is how long will it take to implement change. Improving planning is a key focus for all areas of building and infrastructure and should be a positive for these sectors.
Transportation
- Labour has spoken about its plans to nationalise the rail industry under GBR. The rail network requires investment but is a key pillar of levelling up and moving towards lower-carbon transport.
UK capital markets
The commitment to the fiscal rules will see Labour focus on supply side reform to boost growth and productivity. In this scenario, the election result could be taken as a positive for UK capital markets. Stability and confidence are key. The challenge will be to demonstrate Labour can boost growth while managing a tight fiscal position. If it shows progress on these fronts, then confidence from business and overseas investors will build, leading to a positive outlook for the UK economy and market.
Relative to some other regions, UK equities offer compelling value. A more stable political backdrop, when combined with a rebound in profits and falling interest rates, adds up to a more favourable outlook for UK companies.
