Fund managers give their take on what Labour's win means for markets

With 411 out of 650 seats in the House of Commons, prime minister Keir Starmer is in a powerful position to influence the economy of the UK – and its financial markets – for the next five years.

In the run-up to the election, the former lawyer did not give much away when it came to policy. But encouraged by the presence of former Bank of England economist Rachel Reeves as his chancellor, markets believed his government would be fiscally responsible.

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Now in power, and set to announce more about his future plans for the country on 17 July in his King’s Speech, the future for the economy and markets is about to be formed.

In this article, fund managers give their view on what an economy under Labour will look like and give their views on outlook for stock and bond markets.

Political stability to benefit investors

After three prime ministers and five chancellors since 2019, Starmer could now deliver political stability to the UK.

Azad Zangana, senior European economist & strategist at Schroders, says that although governed by the same Conservative party, the instability made it very difficult for companies and investors to anticipate policy changes and work with government.

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He says: “Overall, the change in government, particularly with such a large majority, should reduce political instability for the nation. A change in the direction of policy back to growing public services is likely to lead to looser fiscal policy and boost economic growth.”

This could be positive for equity markets, according to Paras Anand, the chief investment officer of Artemis Investment Management, who says that the UK could now stand for its stable politics when compared to the US and France.

“All this could mean the UK, from being a poster child for political instability and volatility around economic strategy, could increasingly be seen as a bastion of relative stability.

“This dramatic pendulum swing could mean a material reassessment of the value of UK assets and recovery in the currency, which has devalued substantially over the past decade,” he said.

Will gilt yields rise?

Bond markets are sensitive to government borrowing and spending plans, and if they believe that the government is not going to be fiscally responsible, they will demand a greater return on gilts, pushing up borrowing costs. As we saw with Liz Truss’s ‘mini-budget’, this has knock-on effects for the public due to higher mortgage costs.

Lloyd Harris, head of fixed income at Premier Miton Investors, thinks that Starmer’s plan for growth in the UK will be tested by the gilt market.

"We think Labour’s plan for growth at a time of full employment will lead to higher borrowing costs in the longer-dated parts of the gilt curve especially, and we prefer short duration bonds,” he said.

One reason is that Harris believes rising wages will make inflation more sticky.

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“By linking the minimum wage directly to the cost of living it becomes easier for inflation to become entrenched. Put together with a dash for growth and already tight labour markets, the suggestion is inflation on the services side could remain sticky,” he argues.

On the other hand, the UK now should have one of the most stable and moderate governments out of the major developed world economies, particularly in comparison with France and the United States.

For Craig Inches, head of rates and cash at Royal London Asset Management, this means the UK could be the “best looking pig in the sty”, even though he says growth has been a problem child for many UK governments and the productivity puzzle “remains unsolved”.

Will UK shares benefit?

The initial reaction from the stock market was positive, with the FTSE 100 edging higher and the FTSE 250 adding about 1%. However, the blue-chip index actually fell on the day following the election after initially rising.

Longer term, fund managers think this Labour government will lay the foundations for a growing economy which will benefit the domestic stock market.

William Tamworth, co-manager of the Artemis Smaller Companies Fund, says that economic and political stability, together with an aspiration to strengthen relationships with Europe, could be an important step in rewriting the current negative narrative surrounding the UK.

“After years of outflows, a small change in sentiment could have a magnified impact on the share prices of listed smaller companies,” he said.

Ed Legget, also a UK equity manager at Artemis, says that the new government takes away another one of the objections for not investing in the UK stock market.

“The Labour party used the words ‘stability’ and ‘change’ continuously during the campaign, and businesses will certainly be looking forward to a sustained period of stability after all the turbulence of the past five years,” he said. 

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Which types of shares could perform best?

Although confidence looks set to the return to the UK market, some sectors are expected to perform better than others.

Portfolio manager at NinetyOne, Matt Evans, thinks that utilities are well placed as Labour is emphasising the importance of electricity networks, which could boost investment in the energy grid.  

Renewables as well should benefit, he argues, as Labour is putting net zero as a central policy, given its importance to energy security and reducing energy bills.

He says: “This should be positive for renewables and electricity networks. Labour has identified the oil sector for further taxation. It has previously announced its Green Prosperity Plan, via the creation of a National Wealth Fund and a public body (Great British Energy), funded in part via a windfall tax on energy firms and borrowing.

“Other policies announced include working with the private sector to double onshore wind, triple solar power and quadruple offshore wind by 2030. It also plans to invest in carbon capture and storage, hydrogen and marine energy, and long-term energy storage.”

Housebuilders are also set to be winners, he believes, due to Labour’s plan to build more homes.

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He says that housebuilding has been a central part of Labour’s focus, and a more efficient planning system to drive more housebuilding with an emphasis on affordable homes is a priority. But the key question, he notes, is how long will it take to implement change. 

“Improving planning is a key focus for all areas of building and infrastructure and should be a positive for these sectors,” he says.

Aruna Karunathilake, portfolio manager at Fidelity International, also says housebuilders will benefit.

His view is that Labour will reinstate housebuilding targets and also fund investment in local planning departments, which are under-resourced and inefficient and contribute to delays in the system.

“That should alleviate builders’ concerns about planning bottlenecks impeding growth in the medium term. We have been confident for some time about the attractive long-term prospects for companies exposed to the housing sector because build rates need to rise to address Britain’s growing housing deficit,” he said.

Banks as well could gain, according to Karunathilake. He says that both the Labour and Conservative parties now also seem to be more supportive towards the sector as they are a source of much needed investment and lending to the economy, rather than a pariah industry to be regulated and taxed.

“We will be listening closely to any change in mood music once the new government is in place,” he notes