Aegon Asset Management: Election impact on UK equities

Why? Of course, markets respond to new information and changes to expectations. The election result was neither. It would have taken an error of gargantuan proportions in pre-election polling for anything other than a large Labour majority to be returned. Consequently, the result had been priced in well in advance and a modest gain in UK equities on Friday morning was the only sign of the change in Downing Street. So, what are some of the potential investment implications we can pick out?

Firstly, markets crave stability. The UK has rather lacked that for much of the past decade, but the new government offers the prospect of a more stable environment for the next parliament. Within some other parts of Europe, most notably the UK’s neighbours across the channel, now playing the part of political problem child, things may be turning on their head and international flows could be redirected closer to home.

The message of stability is one that has been emphasised by Labour during the election campaign as well. This is a centrist version of Labour with a pro-business, pro-growth tone (“Britain is a place to do business” said the chancellor this morning) that is far from that offered by the previous incarnation of the party under Starmer’s predecessor.

In addition, the state of the public purse means there is little room for radical fiscal policies and memories of the Truss/ Kwarteng kamikaze budget are too fresh for the new government to try anything along these lines. This does leave them in a rather tricky situation, as they seek to kickstart growth whilst also being fiscally responsible and not raising tax. The growth objective is therefore likely to be more of a medium-term aspiration than an immediate flicking of the switch. It won’t be until the budget in late September or early October that we will get a proper insight into how the new chancellor will approach this conundrum.

Two areas that have been well signposted though are housing and clean energy and we would expect stocks with exposure to these to benefit in the coming months. Labour campaigned heavily on housing, pledging to overhaul the planning system that has stymied homebuilding numbers. With a target of 1.5 million homes to be built in England over the parliament, this is a clear positive for housebuilders, as well as related stocks like Genuit and Volution, which focus on the movement of water and air through buildings, and builders’ merchants.

Clean energy is another area the new government has pledged to throw its weight behind. By removing regulations that have constituted a de facto ban on new onshore wind developments since 2017, the government hopes to match other European nations, which have been adding large amounts of onshore wind capacity in recent years. Stocks related to renewable energy have had a tough time globally over the past couple of years, so this commitment could be a much-needed fillip for UK stocks with exposure to the theme.

One other area that may be affected by the change in government is the hospitality sector – another that has not had its troubles to seek in recent times. Labour’s manifesto pledged fairer financial treatment for the sector, so we may see some rates relief for pubs and restaurants. Combined with food inflation coming down and likely imminent interest rate cuts from the Bank of England, there could be some attractive investment opportunities in the sector. That said, there is also the tail risk that the government makes moves to restrict zero hours contract or to raise the Living Wage, both of which would be detrimental to the sector.

There are also two important factors mentioned in the previous paragraph that are nothing to do with the government: inflation and interest rates. The former is now back to the Bank of England’s target and, consequently, the latter is likely to start to come down in the second half of the year. This should boost consumer sentiment and disposable incomes, as well as providing a direct tailwind to equity market valuations. In particular, this should be a positive for domestically-focused small and mid-cap stocks, so the FTSE 250 should have a good chance of closing the yawning valuation gap that has opened up to the FTSE 100 over the past couple of years.

That bargain valuation argument has certainly not been lost on private equity or foreign listed companies, which are snapping up UK companies at a rate which has rarely been seen before. Companies old and new and from a range of sectors have been, or are in the process of being, acquired: Britvic, DS Smith, Darktrace, Keywords Studios and Dechra Pharmaceuticals to name but a few. An important priority for the new government will be ensuring the UK retains its place as a leading global equity market. To do this, it will need to stem the flow of companies leaving, whether that be through choosing to list elsewhere, or through being acquired. The FCA has already announced an overhaul of the listing regime which reduces the list of actions companies have to seek shareholder approval on and introduces dual share class structures, which are heavily used by tech companies in the US. These changes will not, in isolation, solve the issue and some investors are worried that it will dilute their ability to hold company management to account. However, it is at least a sign that the issue is receiving attention.

In summary, markets are taking a positive view of the new government. It is early days, so concrete policies are still few and it is hard to pick too many specific investment themes outside of those heavily touted on the campaign trail. However, the promise of political stability, a pro-growth agenda and sensible fiscal policy has raised hopes that the UK market may become a more attractive investment proposition than before and certainly one that does not need to trade at such a stark discount to other global markets.

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Exp date: 9 July 2025