Global Head of Macro & Strategic Asset Allocation Salman Ahmed outlines how Labour’s landslide general election victory has the potential to drive a notable shift in the UK macro landscape. He discusses how policies focused on fostering growth and stability – coupled with a more volatile environment across continental Europe – could present an inflection point for domestic assets after a sustained period of relative underperformance.
With Labour achieving a landslide victory in the 2024 elections, UK’s structural macro landscape could experience notable shifts after years of weak outcomes. Labour’s policies, aimed at fostering economic growth and stability, coupled with a more volatile European security and political environment, may present an inflection point for UK assets from a macro perspective after several years of underperformance.
Stronger relationship with the EU
A Labour government is expected to pursue a more collaborative and constructive relationship with the EU. This approach may lead to smoother trade negotiations, reduced tariffs, and more predictable regulatory frameworks, benefiting UK businesses operating within and trading with the EU. By addressing Brexit-related disruptions, Labour’s policies could foster a more integrated and efficient market environment. Enhanced regulatory alignment and reduced trade friction could improve business operations and profitability, making UK equities more attractive and part of the Brexit-driven discount may start to reduce.
Indeed, the European security environment is now very different compared to 2016 and the Russia-Ukraine war and rising likelihood of a Trump win means focus on defence spending and role of the UK in strengthening overall Europe security has become far more critical. With current defence spending of around 2% of GDP already, UK stands heads and shoulders above major European powers such as France and Germany and a potential commitment to 2.5% of GDP may embed the role UK plays here even further.
Overall, stronger ties with the EU (especially given the security environment and changing domestic views within the UK, where latest polls show more than 60% viewing Brexit as a mistake versus 42-43% in 2016) will be critical to attracting European and global investors back to the UK market, further boosting equity valuations, aided by greater capital inflows.
Indeed, one of the damning indicators showing the impact of Brexit has been the gap which has opened up in business investment trends pre and post EU referendum of 2016. According to Centre for European Reform analysis, the gap stands at 11% in real terms between extrapolation of pre-Brexit trend versus current reality. In addition, UK’s business investment trends are currently the worst in G7 using data since 2016. A stronger relationship between the UK and EU here will be critical when it comes to closing this gap and improve UK’s relative standing as an attractive destination for business investment.
Fiscal restraint
Despite expectations of some increased government spending, Labour has signalled a commitment to fiscal responsibility and a cautious approach to tax increases, at least in the short-term. According to OBR projections, Cyclically Adjusted Net Public Sector Borrowing is projected to fall to around 1.4% of GDP by 2028 from a peak of nearly 7% in 2022. These projections incorporate automatic cuts to spending starting in coming years.
Growth will be key and political stability, coupled with movement on EU relations, may help maintain the projected fall of debt burden without crippling spending cuts or tax rises. Indeed, we think for the next 12 to 18 months any meaningful tax rises are unlikely but the situation may change down the line if growth doesn’t pick-up meaningfully to help reduce the public debt load, which now sits above 100% of GDP.
Political stability will help investor sentiment
Labour’s approach to governance, coupled with the very strong majority, may bring about a period of political stability, which has been lacking in recent years. This stability is crucial for investor confidence. A predictable and stable political environment can attract foreign investment and improve overall market sentiment towards UK assets, where equities are trading at a meaningful discount versus global peers. Already, we have seen the government announce changes to the planning laws to help alleviate housing shortages, which signals both a willingness to act quickly and the importance of having a strong majority, when it comes to delivery.
Overall, reduced political risk could lead to lower volatility in the stock market, higher expected returns as valuations adjust, providing a more favourable backdrop for long-term investment decisions. Moreover, consistent and transparent policymaking under Labour could enhance the UK’s reputation as a reliable investment destination, encouraging both domestic and international investors to increase their exposure to UK equities.
Here, the rise of far right in Europe, political log jams in countries such as France and potential political instability in the US also puts UK in a better position on a relative basis after years of instability which started with the 2016 Brexit vote.
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Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon.
