21/07/2023 Keir Starmer’s Labour party are consistently ahead in the
polls, and with a General Election just around the corner investors and traders should be
looking at what impact this might have on the financial markets.
In this piece our
BlondeMoney partner Helen Thomas discusses the way things are shaping up politically and
economically; and our own chief market analyst Neil Wilson delves into some of the potential
market impact.
Helen Thomas from BlondeMoney writes:
The
political landscape The Labour Party will have an opportunity to wipe the slate
clean for an economy that has succumbed to stagflation and a politics more consumed by who
ate cake than a vision of values for the country. But with Reeves and Starmer keen not to
frighten the horses, how much will actually change once they take power? Labour’s 86-page
policy manifesto certainly charts an ambitious course, focusing on five key areas: the
economy, the NHS, crime, climate change, and education.
- On Education, they hope to raise £1.6bn by
revoking
private
schools’ charitable status - On Health, shadow Health Secretary Wes Streeting has
promised
“the
most substantial expansion of NHS personnel ever seen” - On Climate Change, they want to create a thriving green economy,
encompassing
sustainable
transport, renewable energies and waste management - On Crime, they
will
put
more police on the streets and increase the number of Crown Prosecutors
But how are they going to pay for it all? Shadow Chancellor Rachel Reeves has already had to
row back
on the £28bn
planned for the ‘green prosperity scheme’, turning it into a target to aim for rather than
an amount of money to be allocated. Thanks to the huge government response to the Covid
pandemic and the help with energy bills prompted by the Ukraine war, the UK debt pile has
now
topped
100% of GDP
for the first time in over 60 years. Rising interest rates keep adding to the pile as the
debt interest must be serviced. That doesn’t matter if the economy is growing but it’s been
a gloomy flatlining story since the Covid shutdown and reopening dropped out of the data: 
Liz Truss tried to kickstart the growth agenda but the
near-collapse of the UK pension system in the aftermath of her ill-fated intervention has
scarred politicians of all stripes. Just as Sunak and Hunt are desperate for fiscal
credibility, so too are Reeves and Starmer. Extra borrowing, particularly with a hawkish
Bank of England keeping interest rates high-for-longer, feels too risky. Tax hikes feel
politically suicidal, not least with the UK tax burden at a post-war high,
according
to the
Office for Budget Responsibility. So we are left with little tweaks, like Labour’s promise
to
eliminate
the
non-domiciled tax status, which it thinks could raise £3.2bn. This is a drop in the ocean.
The government had to
pay
£7.7bn on debt
interest in the month of May alone. The economy has undergone a seismic shift since March
2020 and has not yet settled into a new equilibrium. Working from home has become the new
norm, even if just for one or two days of the week. We live a more virtual life, shopping
and chatting online. The boss of British Airways
told
the Times that
the decline in business travellers is being replaced by leisure holidaymakers treating
themselves to an upgrade. Unemployment remains low and wages are high, even alongside
persistent inflation. The much-vaunted fears of a housing collapse might not hurt that much
given
only
28% of UK
properties are mortgaged, a proportion that has fallen ten percentage points since 2008.
Huge economic change heralds massive political change. The current crop of politicians are
operating under constraints from the past rather than grasping the nettle for the future.
Threats bring opportunities. As Barack Obama’s Chief of Staff
said
as he took
office during the implosion of the financial system in 2008/09, “you never want a serious
crisis to go to waste… it’s an opportunity to do things that you think you could not do
before”. The Labour Party certainly need a big shake up even to get into government. To
achieve a majority of just one seat they would need the biggest post-war victory since Tony
Blair in 1997. 
Herein lies the problem. Starmer ain’t no Blair. At
least, not yet. The election has to be held by January 2025 with an expectation Sunak will
go to the country in October 2024. But Starmer got a lucky gift from north of the border.
The implosion of the SNP in the wake of an expenses scandal means there are plenty of seats
up for grabs. Labour currently only have one MP in Scotland, compared to the 56 they had
when Blair won in 1997. With the issue of independence on the backburner, a demoralised and
frustrated Scottish electorate could turn back to their previous inclination to back a
left-wing party. A gain of even 20 Scottish seats should be enough to ensure the Labour
Party is on its way to a Westminster majority. Once in power, Labour could then revert to
type, borrowing more, spending more, and whacking up taxes, such as introducing a wealth
tax. Polling
shows
two-thirds of
Labour voters support a 1% tax on anyone with assets over £500,000. Fiddling around the
edges comes easily to anyone who is promoted beyond their competence. Labour Party
politicians have never been tested in high office. The party itself remains riven with
incoherence and in-fighting. But Starmer has managed to steady the ship and unite the party
behind an electoral offering that currently appeals to almost 50% of voters. If he can gain
that elusive solid majority, he could make great changes. Until his mandate and direction
becomes clear, the UK will remain in a whirl of political uncertainty. This will weigh on
the currency and add a risk premium to Gilts. 
Helen Thomas
CEO of BlondeMoney
Neil Wilson, Finalto’s Chief Market Analyst writes:
The
market impact of Labour policy? So how might markets react to a Labour government?
In the past it might have been easy to call this one: the City never really liked a
socialist government and bankers always liked a Tory in Downing Street – good for animal
spirits and tax. The threat of nationalisation loomed over industry; the threat of higher
taxes scared the rich and would put off companies investing, etc. Consulting firm Korn Ferry
found four out of five blue chip CEOs thought a Jeremy Corbyn government would be more
harmful than anything related to Brexit. But Starmer is a different prospect, and the
economic backdrop has changed greatly. For starters, Covid has upended global value chains
and left Britain with one of the worst inflation environments since the Second World War.
Growth has been extremely sluggish and Brexit looms eternally. The first question for the
market relates to the current situation: what is it like now and what could realistically
change with a new government? The current high debt, high inflation and high tax structure
leaves little room to spend more. In a sense we, under the current Tory leadership, already
have classic ‘market-unfriendly’ policies that people might normally associate with Labour.
Liz Truss and Kwasi Kwarteng found out to their cost the risks in doing anything
trickle-down. The landscape is so very different today and industrial policy is back on the
agenda. Although Labour has pared back plans to borrow and invest £28bn a year through to
2030 for its green prosperity plan, it would seem likely – though far from certain – that a
Labour government with a workable majority would be inclined towards setting more of an
industrial policy than the current Conservative regime. Leaving detailed figures aside, we
can see Labour taking a more activist approach – something akin to the Bidenomics industrial
policy in the US. This would suggest more borrowing, which all else equal could push up gilt
yields still further. However, given the sluggish economic growth at the moment, markets may
however actually like to see Downing Street going down this route – boosting productivity
and increasing capital investment and infrastructure spending is exactly the sort of thing
that could boost growth and, importantly for traders, increase company valuations. I think
the thing to realise is that we are into a new paradigm of higher government spending &
borrowing, which means persistently higher inflation and interest rates. The good news is
that this may be spent on the big stuff that we need to be more productive and raise living
standards. Coming onto companies, Labour has retreated from a pledge to nationalise water,
energy and the Royal Mail – this is not Corbyn; nothing like as market unfriendly as it was
in the past. The City can probably rest assured that grandiose nationalisation schemes are
simply far too costly right now. But tax raids will be something to watch, particularly in
banking and oil & gas. Uncertainty over tax may be make UK companies less attractive.
And oil & gas companies will of course be acutely aware of Labour’s pledge to end
exploration in the North Sea. On the whole, however, instances of Labour taking what would
be viewed as a business-unfriendly approach to tax is likely to be isolated to specific
companies and sectors and not weigh the UK equity market in the round. Water companies may
need to watch out. Employment rights could be an area for concern for investors as Labour is
working on a raft of policies to shift rights away from companies to workers. Britain’s
flexible labour market and laissez-faire approach to this area of policy has been seen as a
positive for businesses looking to set up here. As such this type of approach could make the
UK be seen as a less appealing place to set up shop – though other factors would continue to
mean Britain remains a top destination for foreign investment, such as the strength of
company law, educated workforce, etc. One to watch, however, when it comes to companies
shifting workers out of the UK and into, say, mainland Europe. And talking of Europe – does
the Rejoiner camp rally if Labour wins? Long-term that ought to have some tail risk for
sterling but I don’t see Britain rejoining the EU for a long time. On the Scottish side, a
big win for Labour in taking seats off the SNP will help to push Scottish independence
further off the table, which on a tail-risk point of view is sterling-positive net of other
factors. How does the stock market react to elections? First of all,
markets always prefer certainty – so the stock market has tended to do better when results
are easily predicted and not really close. Time will tell, with Labour so far out in the
polls right now, whether this time falls into the easy-to-predict or too-close-to-call
camps. In ‘97 the stock market in Britain rose before, during and after the election
campaign. In 2010, a rally fizzled because of the uncertainty – in the end no party won
outright and we got the Coalition. show markets prefer a Tory government. A study in the
Stock Market Almanac looking elections from 1945 to 2010 showed UK equities tended to rise
by around 10% in the years of Tory election wins and fall almost 6% in years when Labour won
the most seats. As stated above, the landscape has changed a lot since then – but there is
general preference for Conservative governments, according to the data. UK equities remain
heavily discounted to peers. The current Tory government is tinkering around with ways to
change that by making it easier to list in London and changing the way pension funds are
encouraged to invest. It would be surprising if a Labour government went any further than
this – don’t expect a major overhaul in the City that sees the UK market rerate higher. I
would love to be wrong about this. And if Labour falls back on its old ways then the City
would be seen as a fat goose to pluck with more tax on things like capital gains and lower
investment allowances, which could further dent the appeal of equities over other assets.
Ultimately, the UK market will be at the mercy of a lot more than just who’s in Downing
Street – macroeconomic forces are usually far more powerful than policy. 
Neil
Wilson
Chief Market Analyst at Finalto
All
opinions, news, research, analysis, prices or other information is provided as general
market commentary and not as investment advice and all potential results discussed are not
guaranteed to be achieved. The information may have been derived from publicly available
sources, company reports, personal research, or surveys. Past performance is not indicative
of future performance. Trading carries risk of capital loss. Service available to
professional clients only.