“The ramifications for the UK economy and investment landscape could be meaningful”

Chief Investment Officer Neil Birrell:

Given the state of public finances, there is a limit to what a government can do in terms of spending. It would need to raise taxes to spend more and that risks damaging the consumer sector, which could be fragile if pushed.

Raising corporation tax could be a possibility, but that risks companies deciding to base themselves in countries with friendlier tax regimes. So far, both the Labour and Conservative parties have been vocal on their policy on taxation; it is a hot topic politically, but also a crucial economic one.

The government could borrow more, but borrowing is more expensive now, with interest rates where they are.

The UK stock market looks attractive by historic and international comparison. Furthermore, we are in the midst of a glut of takeovers of British companies from a range of buyers.

At the highest level, there does not look to be too much that the election will result in to throw the rosy outlook into doubt.

However, it’s within the stock market that we need to look to find opportunities and threats. For example, a Labour government may look to change the structure of the railways when the licences expire for the various operating companies.

Similarly, the provision of gas, electricity and water are regulated, the approach to those industries could change as well, all having an impact on the share prices of the companies involved.

Overall, there is plenty for us to consider in the details, but maybe the biggest factor is certainty. Investors, in aggregate, hate uncertainty. In the days after an election that starts to fall away, which is good news.

– Read Neil’s insights on this topic in full here: CIO’s Market Watch – May 2024
– Read more: CIO’s Market Watch – June 2024

“The UK could soon be seen as an attractive place to invest”

Fund manager Emma Mogford:

After years of being seen as “un-investible”, the UK could soon be seen as an attractive place to invest, thanks to the political stability that a Labour majority could bring. That’s good news for investors as an influx of capital into UK markets could push share prices higher.

More foreign investment would also be good for economic growth. Combined with some of the pro-growth policies, such as unlocking planning for construction, I think the outlook for the UK is the most positive it’s been in a decade.

“Political chaos is the next straw man to go”

Fund manager Benji Dawes:

Investors in private companies are in “wait and see” mode given the stubbornness of rates, so deals in developed markets are materially down. An exception is the private equity money coming in for UK-listed companies in a way not seen since pre-Brexit. That tells us something.

In the meantime, the straw men lined up as reasons not to invest in UK plc are being blown away, one by one. UK Gross Domestic Product (GDP) forecasts are being upgraded, UK Purchasing Managers Index (PMI) data is inflecting up, while it is going down in the US and EU, UK household incomes are growing double digits year on year. Political chaos is the next straw man to go.

“It’s basically continuity”

Head of Equities Gervais Williams:

We’re not expecting many surprises from the election. Labour will probably win by a large majority. The vaguely interesting unknown is whether the Reform party and the Conservatives become similar-ish in terms of voting percentages.

I don’t think Reform will get many seats, but I do think that this will be a talking point because in the next election it is possible that Reform may start to match the Conservatives in vote share.

Thereafter, even a small change might lead them to eventually overtake the Conservatives and become the official opposition.

One thing that is excellent for now, is that either way, it doesn’t mean much change. The two main parties are very similar in terms of policies, so from that point of view – in contrast to European elections we’ve seen recently and the US election potentially – it’s basically continuity.

That’s ongoing UK continuity versus the risk of extreme change from Europe and, assuming Trump gets in, possibly the US as well.

At some point in the future, we do anticipate a global recession. Alongside, this might coincide with an unexpected geopolitical event.

If/when this occurs markets may go through a pattern change, where investors preferences evolve from backing US technology companies towards a renewed interest in companies that pay an income, given that consistency of returns is more valuable when markets are volatile.

Given this background, we are reassured to note that the UK exchange has recently broken out on the upside, potentially starting a new outperformance trend for the first time since 1999.

Any additional interest in company stocks that provide an income from here might accelerate the new UK outperformance trend. If the enthusiasm for US technology companies were to fade at the same time, then the UK market outperformance trend could accelerate.

It would be very little to do with the new UK government, or any expectations regarding the UK economy. Rather it might be driven by worries about current concentration and stock market risk.

Overall, we believe it is a brilliant time to invest in the UK.

– Read more: The Great British Sell-Off – does it provide an opportunity for micro-caps?

“All eyes on cabinet appointments and the King’s Speech”

Assistant fund manager Mahgul Ansari:

Labour’s fiscal plans are ambitious, and whilst potentially viable Starmer may need more than a term to achieve them. At the time of Labour’s last election victory in 1997, UK government debt to GDP stood at around 37% whereas it now stands at just under 1x GDP.

Part of Labour’s plans are to reduce this figure whilst simultaneously increasing public spending, rendering future tax increases highly likely. However, these must be implemented carefully so as not to hinder economic growth, the first of Starmer’s 5 “missions” underpinning his approach to government.

Wealth taxes are likely to be a key area of focus as well as tobacco duties, potentially. Two sectors which may benefit from a change in government are housing and related sectors, as well as retail and services.

For the former, Labour has announced some supply side reforms to ease bottlenecks in land planning consents, which could unlock improved profitability for housebuilders and landowners in the next cycle.

Consumer confidence may also rise post-election, partly as a result of perceived political stability and also measures to support workers’ pay and rights.

Renewables are also likely to benefit whilst oil and gas will lose out, with increasing taxes for North Sea oil and gas producers. The first few days and week post-election are likely to set the tone of the next government, with all eyes on cabinet appointments and the King’s Speech in mid-July.

“Plans for growth will be tested by the gilt market”

Head of Fixed Income Lloyd Harris:

We think that Starmer’s plan for growth in the UK will get tested by the gilt market. With full employment in the UK, the only way to grow is to increase wages, unless there are new entrants into the labour market through either greater immigration or a greater necessity to work (less benefits).

With both of these seemingly off the table, then the only outlet can be wage growth, which will keep services inflation sticky.

A microcosm of this is house building. If planning laws are relaxed and more houses actually get built, then who are all those tradespeople that are going to build the houses?

Wages in this sector are set to rise and the cost of building a house will go up. And we’ve not even talked about the unions expectations of greater wage settlements for public employees.

All those doctors will need a pay rise to pay their now taxed private school fees! In short, we think Labour’s plan for growth at a time of full employment will lead to higher borrowing costs in the longer-dated parts of the gilt curve especially (i.e. for long dated government debt), and we prefer short duration bonds (those with a shorter time to maturity).

“Will the election result in red, blue, orange or greener actions?”

Head of Responsible Investing Helene Winch:

Will the election result in red, blue, orange or greener actions? While we think ahead to the outcome of the Election, we have considered which party might be elected and how green their plans may be.

We are all aware of Labour’s “dropped” £28 billion green investment pledge, which was designed to emulate the US’s green investment plan called the Inflation Reduction Act and support economic growth and grow jobs.

While the big number has been dropped, the commitment to setting an industrial strategy that is consistent with net zero and the delivery of affordable and clean energy remain.

A focus on driving investment into decarbonising the electricity network alongside reforming planning laws which will finally allow the cheapest UK electricity, onshore wind, to be built, is an area to watch.

On pension reform, one area to closely monitor is how the new government will encourage the £2.5 trillion plus of UK pension savings to support the government plans, whether this is green investment required by the grid, supporting innovation or partnering with UK Energy.

Key here is how to make the UK more attractive across global markets to domestic investors, whether through tax incentives on UK equities or changes to pension regulation.

Further consolidation across the thousands of small pension schemes and the rumoured creation of the UK sovereign wealth fund to support UK investment may lead the way.

Lastly, we’ll be following possible social policy reform that aims to reduce the inter-generational wealth inequality, by supporting the young with affordable housing and with improvements to education which will support jobs, improve productivity and ultimately drive economic growth.

“Not expecting any major surprises”

Fund manager Alan Rowsell:

Historically, UK economic growth has been similar under both Conservative and Labour governments. So, the result of the election is unlikely to have much of an impact on the overall economy.

Also, given the Labour party has shifted towards the centre since the last election, there is not too much difference in terms of economic policy between the two parties.

Therefore, I am not expecting any major surprises or volatility in the UK stockmarket, even if Labour don’t win a majority which is the consensus view.

Elsewhere in the world, we have seen some election surprises this year in India, South Africa and Mexico. These did move markets so it goes to show that elections can have an impact, at least in the short term, but I’m not expecting that to happen in the UK.

“No huge change for UK utilities”

Fund manager Jim Wright:

Unlike in 2019, the prospect of a Labour victory doesn’t mean huge changes for UK utilities.

Some longer-term planning and co-investment in new projects from GB Energy present a constructive scenario, but one of the first challenges for a new government will be the release of the water regulator the Water Services Regulation Authority (Ofwat) draft determination for the period 2025-2030 only a week after election day.

“The most notable potential impact for real estate: housebuilding targets”

Fund manager Alex Ross:

For real estate, the most notable potential impact from a Labour victory would be attempts to unlock parts of the planning process across the UK, although in practice it will be a huge challenge to deliver the housebuilding targets they are proposing.

We believe their growth policies in a tight labour market are likely to lead to further wage growth pressures and thus restricts the outlook for material interest rate cuts.

This wage growth is positive for a number of more operational real estate sub-sectors where you can capture the cashflow growth required in a higher debt cost environment, as opposed to the bond-like long leased income that worked so well for property investors during the ultra-low rates years.

As such, we see an increasingly positive outlook for rents in the shorter lease areas of the market where there is pricing power, including now in retail commercial property, where pricing power will turn increasingly in favour of the landlord, and where the cashflow growth allows them to perform well in a higher interest rate, higher growth environment.

We also see benefits for active real estate companies regenerating property, where we expect the planning improvements to have a material impact, particularly when converting poorer quality retail commercial property and offices to residential.