As the UK heads towards a General Election in less than six weeks, polls suggest that the center-left Labour Party might come back to power after 14 years. Analysts believe this could have a positive impact on the stock markets.
If Labour wins, it would replace the Conservative Party, currently led by Prime Minister Rishi Sunak, who announced the July 4 election last week. Even if Labour doesn’t secure a parliamentary majority, they could potentially form a coalition government with a smaller party, unless the Conservatives perform unexpectedly well.
Historically, UK stocks have shown a mixed response to elections. According to research by Citi, UK stocks have generally been “relatively flat to down” in the six months following elections, excluding periods of extreme financial volatility like the DotCom crash and the Great Financial Crisis. Specifically, the MSCI UK index has risen by around 6% six months after Labour victories, but fallen by around 5% following Conservative wins.
The FTSE 250 index, which is more focused on domestic companies, has typically outperformed the FTSE 100 after elections, with even stronger performance following Labour victories. Defensive stocks and financials tend to do better post-elections, with energy stocks performing well regardless of the winning party.
While some might worry about the stock market’s performance under Labour, historical context is important. For example, the stock market has struggled during Labour governments in the past, but these downturns coincided with significant global events like the Great Depression, post-war recovery, the oil shock of the 1970s, the DotCom crash, and the Great Financial Crisis.
John Higgins, Chief Markets Economist at Capital Economics, suggests that attributing these downturns solely to Labour would be misleading. He also notes that UK stocks have generally underperformed since the Conservatives took office in 2010. Therefore, he doubts that Labour’s return to power would significantly impact investors this time around.
Labour leaders, including Shadow Finance Minister Rachel Reeves and party leader Keir Starmer, have emphasized their commitment to fiscal discipline, aiming to reduce national debt as a share of GDP. Reeves, with her banking background, has been engaging with business leaders and the financial sector to reassure them of Labour’s economic policies.
Barclays CEO C.S. Venkatakrishnan remarked that political risk in the UK is currently lower than it has been in the past, and the economic policy differences between the major parties are minimal. Labour plans to criticize the Conservatives for increasing public debt and damaging economic credibility, particularly during the brief tenure of Sunak’s predecessor, Liz Truss.
Regarding the British pound, historical data shows that Labour governments have coincided with significant devaluations of sterling. However, these devaluations were often due to broader economic factors, such as the collapse of fixed exchange rate regimes and the Great Financial Crisis.
Analysts predict that the outlook for the pound and UK government bonds will be more influenced by interest rate expectations than the election outcome. Foreign exchange market reactions tend to be stronger when there is high uncertainty around an election, which is not the case currently. As seen before the 1997 Labour win, sterling experienced only modest gains leading up to the election.
In summary, while UK elections can influence the stock market, the impact is often intertwined with broader economic factors. The upcoming election, with its potential for a Labour victory, might see a positive reaction from the markets, but long-term effects will depend on global economic conditions and policy implementations by the new government.
