22 Jul 2024
By Sonja Laud , Christopher Jeffery , James Carrick
We weigh what the Labour win means for the macro outlook and what the vote tells us about longer-term themes.
The UK election has just concluded with a stark, if not wholly unsurprising result: the Labour party has won a landslide victory, ending 14 years of rule by the Conservatives.
Apart from moderate gains in certain UK domestic stocks, such as housebuilders, the overall market reaction has been muted – suggesting investors had largely priced in such an outcome.
Before we weigh the longer-term investment implications, it’s worth noting that where such risk events affect the assets we manage, we focus on managing risk to achieve our clients’ long-term objectives.
Our overall approach is best summarised by the motto: 'prepare, don’t predict'. This means we undertake rigorous scenario planning, rather than seek to forecast outcomes.
Elections matter to markets when they usher in changes to the outlook for growth, inflation and, as a result, monetary policy.
In fiscal terms, the plans outlined in the Labour manifesto do not suggest a dramatic departure from the outgoing Conservative administration’s stance. We will be awaiting the Budget later this year for more direction on this front, even though the deficit means there is little wiggle-room.
One possible ‘rabbit-in-a-hat’ moment could be an overhaul of planning reform. If the new government manages to achieve this, alongside unlocking private sector investment and ushering in a sustained period of political stability, it could lift economic growth over the medium and long term. This, in turn, would likely boost sterling, in our view.
Gilts are likely to take their cue from the Bank of England, which we anticipate will begin cutting interest rates during the second half of 2024 – possibly as soon as August.
Beyond those domestic sectors affected by specific policies unveiled over the coming weeks and months, we expect UK equity and credit markets in aggregate to continue to reflect global factors, given that much of their revenues is derived internationally.
There are some important parallels between this election and others that have taken place elsewhere around the world, or are scheduled for later this year.
The strength of the Reform party in the UK speaks to the gains by Marine Le Pen’s National Rally in France – and the topics that are already dominating the presidential campaign in the US. These include inequality and immigration, issues on which large numbers of voters appear to be expressing frustration.
On a longer-term view, as we noted in our spring update, we believe uncertainty and change are probably the only two constants investors can expect. That’s because we’re all adjusting to a multi-polar world, during a period of technological advances, demographic challenges and geopolitical strife.
This makes diversification[1] more important than ever, in our view, to help withstand a range of economic scenarios – and mitigate the impact of any single market event.
Listen to a discussion of the election by the authors of this post on LGIM Talks here.
[1] It should be noted that diversification is no guarantee against a loss in a declining market
Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.