What a new Labor government will mean for investing in the UK

Britain’s Labor Party won big in Thursday’s election and is now set to take over from the Conservatives after 14 years, at a time when economic uncertainty is still rife in the country.

Britain’s FTSE 100 rose 0.4% as investors reacted to Friday’s election results, while British pound made only slight profits. The FTSE 350 household goods and housebuilding index rose around 1%. Looking at individual stocks within the sector, persimmon shares rose 2.9%, while Taylor Wimpey, Barratt Developments AND Bellway were all approximately 2%.

Interest rates remain high in the UK as the central bank has struggled with high inflation following the Covid-19 slowdown. The two main political parties engaged in different economic and financial demonstrations during the election campaign that are likely to have different consequences for the investment environment.

The Labor Party’s promise, for example, to increase taxes on the compensation received by private equity fund managers has raised some eyebrows and led to questions about what this means more broadly.

Speaking to CNBC, a selection of experts weighed in on the potential impact the change of government could have on UK investment.

The arrival of a new Labor government has yet to move the markets that much, but analysts expect UK assets to become more attractive from here on out.

In a note on Friday, analysts at Jefferies said despite concerns raised by a strong showing for the right-wing UK Reform Party, a Labor victory in the UK election would help the UK appear “relatively stable”.

This, in combination with regulatory reform, “could increase the attractiveness of UK assets,” Jefferies analysts wrote in a research note.

James McManus, chief investment officer at Nutmeg, meanwhile, told CNBC that the vast majority of the time, “the markets don’t really care” about the election. “Historical data tells us that elections and their outcomes rarely move markets when the expected outcome is delivered.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, broadly echoed McManus’ comments in a note published this week, but added that there could be some impact on the economy.

“A widely anticipated Labor victory in the UK could usher in an era of greater stability for the UK … which should help strengthen investor sentiment towards the UK,” she said.

In recent years, the UK’s political landscape has been characterized by frequent leadership changes, which have at times led to market turmoil – particularly during the brief premiership of former prime minister Liz Truss.

Certain sectors – and therefore specific stocks – could also be affected, Streeter noted. Pressure could increase on the utility sector, as workers plan to increase fines for water companies, which are already burdened by high costs. Meanwhile, the party’s promise to boost the country’s defense budget could see the UK’s aerospace stocks benefit from extra spending on new technology and equipment.

Plans from all parties to build more homes could affect the property and housing sector, Richard Donnell, executive director of research at Zoopla, told CNBC.

“Investors would welcome this focus on homebuilding,” he said. “What investors want is more focus on housing and providing the homes the nation needs and leveraging as much private investment as possible to create an attractive investment for more capital and support the government’s ambitions. again.”

Some housebuilding stocks could also see a boost due to Labour’s plans to build new, affordable homes, Hargreaves Lansdown noted.

However, broader economic developments will also be a factor, according to Nutmeg’s McManus. As interest rates are set to fall, so will mortgage rates, which could lead to more people buying or selling homes, he said, adding that it could also have negative effects on businesses. others like furniture and DIY stores.

Aynsley Lammin, an equity analyst at Investec, said Labour’s plan to restore mandatory housebuilding targets would be a “quick win” for the sector which needs to boost planning and supply.

RBC’s head of European capital goods research told CNBC’s Silvia Amaro on Friday that he agreed the homebuilding sector stands to be a major beneficiary of the Labor Party’s landslide victory.

“It’s great front and center for housebuilders, great for the wider building supply sector, bricks,” said Mark Fielding, pointing to two driving factors. “Two big factors: firstly a return to mandated housebuilding targets supporting 1.5m new homes over the next five years, which would be a big positive, and secondly hopes in planning reforms, intended to accomplish it.”

This in turn will allow for faster planning processes and potentially additional central government intervention to move forward with more house approvals, according to Fielding, who noted that investors’ focus would otherwise now narrow on ability of the Labor Party to deliver wider economic growth.

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

Strategists and economists predict British pound will not be strongly influenced by the election.

If the results are as expected, attention will quickly shift away from the UK election, Shreyas Gopal, strategist and Sanjay Raja, senior economist at Deutsche Bank, said in a note published on Wednesday.

“For EUR/GBP, this means turning your attention to choices across the channel [in France]and then the upcoming UK data in mid-July which will determine whether the BoE is able to pull back the push for the first rate cut in early August,” they said.

In the longer term, there are also “no big risks” to the pound under a Labor government, Francesco Pesole, FX strategist at ING, told CNBC. Potential Brexit deal renegotiations would be, if anything, more pro-growth under Labor and the risks of excessive government spending are also low, he explained.

But the pound may still be on track for a tough time, Pesole suggested.

“We see the pound depreciating against the euro over the next 24 months, largely based on our view of larger cuts by the Bank of England relative to the ECB,” he said. Higher taxes in the UK could also weaken its currency – but they are likely to come regardless of the outcome of the election, according to Pesole.

Bond markets have so far not appeared reactive to potential new policies under Labour, Streeter of Hargreaves Lansdown said in a second note published earlier this week.

During the campaign, Labour’s economics spokeswoman Rachel Reeves suggested there could be changes to government borrowing rules in a bid to boost growth and investment. But the bond market’s focus appears to be elsewhere, Streeter said.

“So far, this does not appear to have rattled debt markets, with bond investors appearing to be more sensitive to interest rate speculation than an incoming government’s investment plans,” she said.

— CNBC’s Ryan Browne and Ruxandra Iordache contributed to this article.