What a new Labour government means for UK investment

A general view of Bishopsgate, the financial district of the City of London. The UK economy is expected to grow faster than initially estimated in early 2024.

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Britain's Labour Party won a landslide election victory on Thursday, taking power from the Conservatives after 14 years amid lingering economic uncertainty.

Britain's FTSE 100 index rose 0.4% as investors reacted to Friday's election results, while the British pound gained slightly. The FTSE 350 household goods and homebuilding index rose about 1%. Looking at individual stocks in the sector, Persimmon shares rose 2.9%, while Taylor Wimpey, Barratt Developments and Bellway all rose about 2%.

Interest rates remain high as the Bank of England battles high inflation following the Covid-19 recession. The two major political parties have put forward different economic and financial manifestos during the election campaign, which are likely to have different consequences for the investment climate.

For example, when Labour promised to raise taxes on the compensation of private equity managers, some frowned and questions were raised about what this meant more broadly.

In an interview with CNBC, some experts weighed in on the potential impact a change of government could have on UK investment.

stock market

The emergence of a new Labour government has yet to make a big move in the markets, but analysts expect UK assets to look more attractive from now on.

Analysts at Jefferies said on Friday that Labour's victory in the UK election would help make the country look “relatively stable”, despite concerns raised by the strength of the right-wing Reform UK Party.

Combined with regulatory reform, this could “make UK assets more attractive,” Jefferies analysts wrote in a research note.

Meanwhile, James McManus, chief investment officer at Nutmeg, told CNBC that in most cases, “the market doesn’t really care about the election.” “Historical data shows that elections and their outcomes rarely move the markets when the expected outcome is achieved.”

Susanna Streeter, head of funds and markets at Hargreaves Lansdown, broadly agreed with McManus's comments in a report this week, but added that there could be some impact on the economy.

“A Labour victory is widely expected in Britain, which would help to bolster investor sentiment towards the country by ushering in an era of greater stability,” she said.

In recent years, the UK political landscape has been characterised by frequent changes in leadership, which led to market turmoil, particularly during the short term of former Prime Minister Liz Truss.

Streeter pointed out that some sectors and therefore certain stocks could be affected. The public utilities sector could be under pressure as Labour plans to increase fines for water companies already burdened by high costs. Meanwhile, British aviation stocks could benefit from additional spending on new technology and equipment as the party pledges to increase the national defense budget.

Real Estate Market and Housing

Richard Donnell, managing director of research at Zoopla, told CNBC that if all political parties were to announce plans to build more homes, it could have implications for the property and housing sectors.

“Investors will welcome the focus on housing construction,” he said. “What they want is a greater focus on housing, delivering the homes the country needs, and leveraging as much private investment as possible to create attractive investment for more capital and support the new government’s ambitions.”

Hargreaves Lansdown said some housebuilding stocks could get a boost from Labor's plans to build new affordable homes.

But broader economic developments could also be a factor, according to Nutmeg's McManus. He said that as interest rates fall, mortgage rates will also fall, allowing more people to buy or sell a home, which could also have implications for other businesses such as furniture and DIY stores.

Investec equity analyst Aynsley Lammin said Labor's plan to restore mandatory housebuilding targets would be a “quick win” for the sector, boosting planning and supply.

RBC's head of European capital goods research told CNBC's Silvia Amaro on Friday that she agreed that the homebuilding sector would benefit the most from Labor's landslide victory.

“It’s front and centre for housebuilders, the wider building materials sector and brick,” Mark Fielding said, pointing to two drivers. “The two big ones: firstly, the return to mandatory targets for housebuilding of 1.5 million new homes over the next five years is a huge positive. Secondly, the hope for planning reform to get that done.”

According to Fielding, that would speed up the planning process and open up the possibility of more central government intervention and more House approval. He added that investors' attention would now turn to Labor's ability to deliver broad-based economic growth.

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

British pound

Strategists and economists predict that the British pound will be largely unaffected by the election.

If the outcome is as expected, attention will quickly fade from the British election, Deutsche Bank strategist Shreyas Gopal and chief economist Sanjay Raja said in a report published Wednesday.

“For EUR/GBP, this means keeping an eye on the elections through the channel. [in France]And the UK economic data due in mid-July will determine whether the BoE is able to deliver its first rate cut in early August,” they said.

There is also “no significant risk” to the pound under a Labour government in the long term, ING foreign exchange strategist Francesco Pesole told CNBC. He explained that a potential renegotiation of the Brexit deal would be more growth-friendly under Labour, and the risk of excessive government spending is lower.

But Pesole predicted that the pound could still struggle.

“We see the pound depreciating against the euro over the next 24 months, primarily because of our view that the Bank of England will make bigger cuts than the ECB,” he said. According to Pesole, the UK’s tax hikes could weaken the currency, but that is likely to happen regardless of the election outcome.

Bond Market

In a second report published earlier this week, Hargreaves Lansdown's Streeter said bond markets had so far shown little reaction to potential new policies under Labor.

During the election campaign, Labor's economic spokeswoman Rachel Reeves suggested the government could change borrowing rules to boost growth and investment. But the bond market's focus seemed to be elsewhere, Streeter said.

“So far, this does not appear to have perturbed bond markets, with bond investors appearing more sensitive to interest rate speculation than to the new administration's investment plans,” she said.

CNBC's Ryan Brown and Luxandra Yordecke contributed to this article.

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