Labour’s landslide victory in the 2024 UK general election sees the party return to government after 14 years in opposition with a large majority of 174 — similar to the 179-seat majority Tony Blair won in the 1997 election. Compared to previous elections, the lack of fiscal headroom and a closer alignment to the political centre means the outcome is not as large a shift from the status quo as previous Labour victories would have been. However, there are still several areas where we believe the new government could potentially impact financial markets.
Fiscal plans
Rachel Reeves struck a downbeat tone in her first major speech as UK chancellor, warning that UK public finances are in the worst state since the second world war. While this may contain more than a trace of hyperbole, it is undoubtedly true that there is little fiscal firepower available and minimal appetite to significantly increase borrowing with the fallout from Liz Truss’s “mini-budget” still fresh in the mind.
Labour has repeatedly stressed the importance of fiscal responsibility and balancing the books and its manifesto ruled out raising any of the main taxes; that is income tax, national insurance, VAT and corporation tax. Given that these account for around 75% of tax revenues, the options available for raising revenue are limited. The absence of clear guidance on capital gains tax (CGT) and inheritance tax (IHT) has led to speculation that these could be targeted.
The government plans to target boosting economic growth, rather than raising taxes, to provide additional revenue for public spending. Although this aim should be met with a healthy dose of scepticism, there are reasons to be hopeful that growth could be boosted. There is a substantial amount of personal savings in the UK (12% vs 6%-7% for the US) that, if untapped, could provide an investment and consumption boom. The savings rate can be viewed as a measure of consumer confidence and if the new government is viewed favourably in this regard, then some of these funds could be unlocked as “animal spirits” are awoken in the economy.
Stock market
Looking at the historical performance of UK equities since WWII, stocks have, perhaps surprisingly, performed better under a Labour government than under the Conservatives. The approximately 0.25% annual outperformance is not stark, and it should be noted that periods of substantial declines in the 1970s and 2008 were under Labour. However, it does demonstrate that a more left-leaning government is not necessarily a bad thing for stock market investors.
On the whole, while elections undoubtedly matter, the government’s impact on the stock market is usually not as significant as many would believe. Long-run stock performance is based on company fundamentals and given that most UK blue-chips operate globally, they are not that sensitive to domestic developments.
An example of this is the post-election markets returns since 1979. In the following six months, the average return under Labour is 5% compared to 2% in other instances. However, closer inspection reveals the positive performance can be almost entirely explained by global market moves. If viewed in relative terms against a global index, UK equities have been pretty much flat.
Sectors to watch
Housebuilders
There was a notable positive reaction in housebuilder stocks to Labour’s victory, with shares gaining 2%-3% in the aftermath of the result. Although this is good news for the sector, we feel it is unlikely to be enough on its own. There is a clear plan to stimulate the supply-side of the equation with a return to mandatory housing targets and easing of planning restrictions. The issue is that you can't force someone to build (or buy) a house, and without addressing the demand side there is a limit to how much impact there will be.
To be clear, the human demand for housing is high and rising; the economic demand is more muted. Almost everyone wants to buy a home, but not everyone can afford to. The impact of higher interest rates on mortgage costs is a headwind to affordability and there is little to suggest that there will be largescale Bank of England (BoE) cuts in the next 12 months.
Banks and financial institutions
The BoE’s treatment of tiered reserves is one area that has been touted as a potential source of tax revenue, most prominently by Reform UK who claimed it could raise £38bn. Although Labour’s stance is not as bold, they have said they might consider a similar stance to that of the European Central Bank. In essence this would mean that the BoE pays a lower level of interest on bank reserves deposited with the central bank.
This would clearly reduce the interest revenue received from commercial banks, but its impact would likely be fairly muted, given that banks can protect margins by adjusting the interest they themselves pay to savers.
Utilities
There was also some initial optimism in the utilities space to the result. Labour plans to turn Britain into an “energy superpower” through scaling up renewables while not granting any new oil and gas exploration licenses.
“Great British Energy”, a state-owned company, lies at the heart of these plans and the government has said it wants to co-invest alongside the private sector to kick-start less mature technologies. £3.3bn of its planned £8.3bn funding over the first parliament will be used to fund local authorities.
There are ambitious plans to double onshore wind, triple solar and quadruple offshore wind. If successful this would mean producing an additional 140 gigawatts, three times the current average UK daily consumption. However, reports suggest hitting these targets would require substantially higher levels of investment, so there is still a reliance on private capital to underpin these projects.
A windfall tax of North Sea oil and gas producers would help fund some of these plans. Even though the profit levy is stated to be increased to 78%, it should not have too big an impact on the oil majors’ overall profitability. For example, Shell has only around 3% of its revenue from North Sea oil and is one of the largest investors in renewables, so could benefit elsewhere.
Battery storage could become an increasingly important area as one of the main issues at the minute is that overproduction cannot be efficiently saved for future use.
Conclusion
All in all, there are some potentially significant changes on the agenda in areas such as taxation, housebuilding and the energy sector. Whilst these may create winners and losers from a distributional perspective, we should be encouraged that the Labour party have made economic growth a priority to try and grow the economic pie to provide money to fund public services. The UK’s recent economic record leaves something to be desired (we recently spoke to Simon French, Chief Economist at Panmure Liberum regarding the UK election) as such, measures to improve productivity and confidence in the economy should be welcomed.
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