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Joe Peacock, investment manager at Rathbones Investment Management International, looks at the impact this month’s UK election has had on markets
AHEAD of the UK election on 4 July, pollsters unanimously predicted a Labour landslide. And so it was.
Labour secured 412 seats, giving them a majority of 173. But the old adage that “oppositions don’t win elections, governments lose them” once again showed its truthfulness. The Conservatives lost between 244 and 251 seats, depending on how you account for recently changed constituencies.
The Scottish National Party was broadly washed away, and the Liberal Democrats jumped from 11 to 72, not far behind the Conservative party’s 121.
UK markets are unfazed. The outcome had been incorporated into prices long before the result was confirmed. As we’ve pointed out before, the finances are tight and growth is scarce, so Labour will have to move cautiously to avoid spooking bond markets or harming public services.
It will be a tough road for the new government, given taxes are high relative to the UK’s history, the nation’s debt is as large as the economy and interest rates are higher than they’ve been since the global financial crisis.
Labour’s plans to improve low-wage labour conditions – which are hard to assess today because of their manifesto’s scant detail – present some risks to corporate profitability. Yet investors should be hopeful about the future if the government follows through on its plan to be more investment-focused.
There are helpful trends as well. UK inflation has fallen back to its 2% target. While services prices are still a concern, the trajectory of most economic data suggests this will ease as well. The Bank of England is widely expected to cut interest rates soon, perhaps as early as next month. Falling rates would ease some of the pressure on borrowers, both households and the government.
The government appears focused on spurring economic growth, with aims to boost investment and reform the country’s byzantine planning laws.
If successful, improvements here should mean more efficient public services, more profitable businesses, higher living standards and the ability to reduce both debt and the tax burden. But it remains an “if” at this stage.
