Domestically oriented stocks rallied strongly in the wake of the Labour election win, with the FTSE 250 outpacing its blue-chip cousin won Friday to hit its highest in over two years. It’s a sign, perhaps, that investors are cheering Labour’s win. Sterling also rose after a tentative start to the session to a new three-week high. Positive moves, albeit nothing extraordinary for now. 

FTSE 250 sectors as of 10.23 (BST) – all showing broad based gains 

Source: Reuters Eikon

FTSE 100 – energy and financials lagging  

Source: Reuters Eikon

That could be down to a mix of factors. I believe that greater policy certainty and a sense that Labour could carry out some more politically controversial pro-growth measures – eg planning reform – sums it up. And I think there is always a bit of a buzz after a landslide; a feelgood factor that may or may not be justified on any fundamental basis.  

What are the main issues for UK economic growth? Planning reform, EU alignment, taxation, energy, public sector productivity … the list goes on. Any reform requires trade-offs which will be controversial. A massive majority ought to make it easy for Starmer to push through aggressive reforms; but the mandate is not as clear as all that – it was a on a low turnout, the Labour vote share barely increased from 2019 and was way below Corbyn’s 40% in 2017, plus Lab won a lot of seats by a very slim majority. 

Intuitively, this may make it harder than it appears to deliver deep-seated economic reforms. We know also that Lab will not want a repeat of the Truss episode, so will be minded to play it safe in terms of borrowing.  

So much hangs on two things that Labour can do very little about. One is the global economy – Britain is a small open economy generating next to no productivity growth of its own so depends on the global economic picture. Two, the Bank of England looks as though it’s about to start cutting rates, which will help a lot. To a degree I think there was a feelgood factor coming as we have had some months of real wage growth that is likely to remain for a while yet. 

Big Win, Less Mandate? 

Labour won big. The Tories were not wiped out, but it was very, very bad. A lot of the generals were shot too. The Lib Dems had a spectacular night, the SNP had a spectacularly bad night. Reform won seats – including Nigel Farage at the 8th time of asking – and won a substantial percentage of the popular vote. Indeed Reform won more votes than the Lib Dems but only 4 seats to the Liberals’ 71. Never has the electorate seemed so fragmented and dislocated. This is not 1997. Starmer’s mandate is not as secure as the number of MPs would suggest.  

With a lot of skinny majorities it could be harder for Starmer than the electoral map looks and for Securonomics to deliver really deep economic reforms. The Tories seemingly had a rock-solid position with a majority of 80 in 2019. A lot can change in politics. Starmer’s main opposition could be from within his own ranks. 

What Markets Want? 

Gilt yields are down a touch but that is part of a broader move with German bund yields also down a bit on Friday. There were also rather muted reactions in FX markets as a Labour win was a) well priced and b) not scary for the markets – at least not yet. The question is now – just how bold does PM Starmer go? Is it a case of ‘steady as she goes’ in terms of economic policy so as not to frighten the horses, and face pressure later from within its own ranks to borrow lots more; or go big and bold early on in the first 100 days? Certainly politicians of all stripes have been left affected by the Truss episode and will be mindful of borrowing more, even if actually there is an opportunity to do more. 

Markets may like less of an overhang of political uncertainty. They may like some pro-growth measures. The reality of higher taxes has not bitten yet. In terms of the pound, I think a lot depends on the fiscal credibility of the government, which remains untested. Has the Overton Window shifted in favour of greater borrowing? I’d say ‘yes’ but the market may not agree… A lot of also depends on France and the US elections this year. It will also depend on respective monetary policy moves and the BoE may well be about to embark on a faster and deeper rate cutting cycle than either the Fed or the ECB. This could see sterling come under pressure.   

Investors will look at some potential policy specifics – housebuilding., long-term fixed mortgages, consumer protection measures, moves to boost capital markets, pension fund rules, any windfall taxes on banks or energy firms, etc, etc. In a much broader sense, you think that investors are going to take a different longer-term view of the UK. They may see it as more secure after undoubtedly a degree of policy uncertainty overhang in recent years. It’s an old adage but a true one – markets hate uncertainty, and I think Labour’s win feels like it could draw a bit of a line under the last few years of Brexit, Covid and the Liz Truss episode.  

We shall see how long this lasts though, with the fragmentation in the electorate potentially creating unforeseen pressures. The problems facing the incoming Labour government – low growth, terrible productivity, lack of investment – are none the less for its thumping election win. And undoubtedly new problems will emerge that will test those skinny majorities and the Starmer mandate. 

Neil Wilson

Chief Market Analyst at Finalto

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