Historical data shows that election results rarely move markets when the expected outcome is delivered, and such was the case of the UK general election.
The pound held firm and British shares rose marginally on Friday after the Labour Party was declared the victor of the vote, with Keir Starmer set to replace Conservative leader Rishi Sunak in the role of prime minister, thereby ending 14 years of Tory government.
A Labour victory might have once worried investors, with UK markets typically underperforming for a couple of months after the Labour Party win. However, Starmer’s promises of fiscal prudence in his mandate have provided stability. On Friday morning, the FTSE 100 index was up 40 points to 8278, a rise of 0.49%, while GBP saw a modest rise to 1.2774, up just 0.1%. Moreover, the domestically oriented FTSE 250 hit a new high for the day and is up almost 1.8% after the results.
“Markets appear indifferent to a Labour government, as the Conservatives have lost their political capital and leave behind limited fiscal headroom for spending-driven policies,” Julius Baer researchers told Finance Middle East.
The election outcome is expected to boost UK markets over time, especially in the housebuilding sector, as the Labour Party committed to building 1.5 million new homes, including “the biggest increase in social and affordable housebuilding in a generation.”
“The Labour Party’s win would help the UK appear more stable, leading to UK assets becoming more attractive,” said Vijay Valecha, Chief Investment Officer, Century Financial. “This would in turn lead to a huge boost in UK investments in the coming months.”
“The Labour Party’s win would help the UK appear more stable”
Vijay Valecha
The confirmation of an outcome that was widely anticipated has resulted in Labour’s victory already having been priced into the financial market. The Party has pledged to prioritise strengthening economic growth, enhancing relations with the EU and trying to offer businesses a clear and consistent policy direction.
“There will be a honeymoon period in the UK that might offer a short-term uplift for shares, but the spotlight will soon turn to how they plan to tackle the UK’s strained public finances given Labour’s manifesto pledges on the UK’s health and education services,” said Marc Pussard, Head of Risk, APM Capital.
Peter Garnry, Chief Investment Strategist at Saxo Bank, added: “The effect of the UK election on financial markets will play out over the coming years and the size of the impact will be a function of what economic reforms Labour plans to roll out.”
Under the current budget and the fiscal measures that have been implemented, government debt is expected to rise from 84.4% of GDP to a peak of 93.3% in 2026 and 2027, and then fall slightly to 92.9% by the end of 2028.
