UK equities’ support following a Labour victory driven by a temporary boost from easing political uncertainty will be limited as the expectation has already been widely priced-in by the markets.
Also, for the UK’s stocks to secure robust growth and regain ground against their global peers, three critical factors must align, says the CEO of one of the world’s largest independent financial advisory and asset management organisations.
Nigel Green of deVere Group said, “Markets like certainty and so Labour winning decisively will be welcomed as this removes some of the uncertainty.
“This boost is likely to be limited, however, as the markets have already largely priced-in the expectation.”
For UK equities to maintain a positive trajectory, there are three critical factors, says the deVere Group CEO.
“First, the new government must prioritize and deliver on economic growth. The Labour Party’s pledge to target an annual growth rate of at least 2.5% is a promising start, but achieving this will require concrete plans and effective execution.
“Second, maintaining fiscal discipline is essential. The government must avoid excessive spending that could widen the fiscal deficit or necessitate higher taxes, which could stifle economic growth. A balanced approach to fiscal policy will be crucial in sustaining investor confidence.
“And third, lower interest rates by the Bank of England (BoE). A looser monetary policy, characterized by lower interest rates, would be beneficial for stimulating economic activity. The Bank of England’s cooperation in making borrowing cheaper and more accessible will support stock prices and overall economic health.”
The backdrop of the election suggests a favourable environment for a Labour win, with the market showing comfort in Keir Starmer’s centre-left platform.
Historically, Labour’s support for higher taxes and trade unions has put it at odds with markets, but the current sentiment indicates a shift towards stability and clarity in British politics.
UK shares are currently undervalued compared to their US and European counterparts, based on P/E (Price-to-Earnings) and P/B (Price-to-Book) ratios. The earnings yield combined with dividend yields for the FTSE 100 stands at an impressive 10%.
“This attractive valuation has already begun to attract more inflows, especially following the first round of French elections.
“Despite this, UK equities have lagged behind the Euro Stoxx 50 and the S&P 500 on a year-to-date basis in US dollar terms. The primary challenge remains the lacklustre growth, with the FTSE 100 leaning towards cyclical sectors, which perform better in an expansionary business cycle,” says Nigel Green.
The Labour Party’s growth target is ambitious but necessary. The last period of significant growth was in 2021-22, post-pandemic, when the UK economy rebounded sharply after contracting by 10% in 2020. The IMF projects UK growth at 0.4% in 2024 and 1.5% in 2025, more optimistic than Bloomberg’s forecast of 0.7% and 1.2%, respectively.
“However, these projections fall short of Labour’s goals, highlighting the need for detailed plans to reinvigorate growth,” affirms the deVere Group chief executive.
The future of UK equities hinges on coordinated efforts in both monetary and fiscal policies:
“Actions by the Bank of England to lower interest rates or implement quantitative easing measures will be critical in making borrowing cheaper and stimulating economic activity.
“Also, the government must carefully manage spending and taxation to avoid stoking inflation, which could erode purchasing power and harm economic growth.
“A balanced approach is required to prevent high inflation, which could undermine market confidence and economic stability.”
Green concludes: “While a Labour victory may provide an immediate, temporary lift to UK equities by reducing a level of political uncertainty, it is likely to be muted as it’s priced-in.
“Sustained growth and market performance of UK stocks will now depend on the new government’s ability to deliver on growth, maintain fiscal discipline, and work in tandem with the Bank of England to support the economy.”