What should insurance investors make of the UK election?

The UK Labour Party wins landslide victory after reaching out to big business and promising green investment – what was industry reaction?

Uk Election Image @Pixabay.
What does Labour's victory mean for investors?

The UK’s centre-left Labour Party has won a historic victory and has ousted the centre-right Conservative Party from power after 14 years.

The party ran on a pro-economic growth platform and had made inroads with big business, the City (the UK’s financial district), and key stakeholders for infrastructure and green investment amid a long year of elections globally.

“The immediate market reaction has been muted given the uncompetitive nature of the result, but attention will soon turn to policies that can boost the UK’s economy from day one,” said Neil Mehta, Investment Grade Portfolio Manager at RBC BlueBay Asset Management, on what it meant for UK investors.

Mehta added that “[Labour leader Keir] Starmer has so far conveyed a cautious approach to investors, where making politics boring again reduces uncertainty after the rolling political chaos since 2015”. Labour had been previously criticised for shrinking numbers around a green infrastructure pledge.

“Aware of not upsetting the apple cart, Starmer and his team are likely to look for quick wins before the Autumn budget, be it via reducing EU red tape to open up trade and investment, to re-configuring the Bank of England’s remit to save on Quantitative Tightening indemnity, which is creating a fiscal drag,” he said.

“While the serious structural challenges in the UK will be very difficult to fix, the new government may find itself with a reasonable honeymoon period and some favourable short-term tailwinds. Investors are likely to give them the benefit of the doubt for now."

"In terms of investment strategies, we can expect sectors related to clean energy and infrastructure to experience a boost based on Labour’s pledged policies."

Others said that they were preparing for more green investment imminently. “In terms of investment strategies, we can expect sectors related to clean energy and infrastructure to experience a boost based on Labour’s pledged policies in these areas,” said Yazmin Boden, Partner of GSB Wealth. Other key sectors likely to benefit include banking, construction, and retail, she said.

“Labour’s pro-growth funding strategy is likely to provide a favourable environment for medium-sized companies listed on the FTSE 250 index,” Boden said. “The creation of a national wealth fund and support for key sectors like financial services and automotive should stimulate business investment.”

Boden also highlighted Labour’s promise of stability after five Conservative prime ministers, which could help boost economic fortunes. “The anticipated stability of a Labour government - following a merry-go-round period of Conservative prime ministerial changes in such quick succession - is likely to be warmly welcomed by the Markets, its centrist platform having a net positive effect on financial markets, and we could see a stock market uptick going into Q3,” she said.

That economic stability is hoped by many to include -in the investment community as well as generally - conditions that could lead to an interest rate cut.

Impact investor WHEB Group’s Seb Beloe, emphasised Labour’s position to play an important role in giving clear direction and providing policy support to encourage private enterprise to play this role. "As an investor in businesses in the UK and around the world, WHEB firmly believes in the power of private enterprise to develop and deploy solutions critical to social and environmental challenges,” he said.

"Labour has stated its intent to 'make Britain a clean energy superpower' and of its commitment to becoming a Net-Zero economy. Yet, the devil is in the detail. An easy first step in proving its commitment is to make good on its manifesto promise to reverse the Tory decision to prevent the Bank of England giving due consideration to climate change in its mandates,” said Beloe.

"We hope the new [Labour] Government embraces its role to advance the sustainability agenda for the betterment of this generation [while also not compromising on the ability of future generations to meet their own needs]."

Matt Evans, Portfolio Manager, UK Sustainable Equities at Ninety One said that Labour was continuing to put net zero as a central policy, “given its importance to energy security and reducing energy bills”.

“This should be positive for renewables and electricity networks,” he said. “Labour has identified the oil sector for further taxation. It has previously announced its Green Prosperity Plan, via the creation of a National Wealth Fund and a public body (Great British Energy), funded in part via a windfall tax on energy firms and borrowing.”

Other policies announced included working with the private sector to double onshore wind, triple solar power and quadruple offshore wind by 2030. It also plans to invest in carbon capture and storage, hydrogen and marine energy, and long-term energy storage.

“As profits begin to rebound, UK politics stabilises and interest rates begin to fall, we see a more favourable outlook for UK companies.”

The Alternative Investment Management Association‘s (AIMA) CEO Jack Inglis reiterated that the Labour Party has said it will champion the financial services sector in his statement, which is “one of the UK’s greatest assets and best avenues to achieving its ambitious growth targets”.

“AIMA looks forward to engaging with the new government to ensure that private sources of capital play a central role in boosting investment across the country and ensuring the UK retains its position as a globally competitive alternative asset management centre,” Inglis said.

Ninety One’s Evans said that the UK has suffered from uncertainty and political instability since it left the European Union but that that may begin to improve. “UK stocks offer compelling value on a global comparison,” he said. “As profits begin to rebound, UK politics stabilises and interest rates begin to fall, we see a more favourable outlook for UK companies.”

Ninety One’s press release said it was “A new political landscape. “As [Labour] progress through their term, the UK’s economic challenges of planning reform, EU alignment, tax reform and public sector productivity will not easily be solved and will depend on potentially controversial trade-offs,” said Evans. “Despite this, the ‘Securonomics’ Labour is going for should support stability in the shorter term. Monitoring policy implementation and improving growth will be key to retaining confidence.”

"The new government hopes growth will provide the flexibility
to spend more over time.”

Evans said that, for the country as a whole, fiscal policy was set to “show little change in the early days as Labour has consistently communicated there will be no major tax rises, no significant spending cuts and no slippage from current fiscal rules, all while boosting growth”.

“This will be tough to achieve,” he said. “The first budget could happen in mid-September, but it will more likely come after the Labour Party conference, sometime in October or November. Expectations are for a cautious start. The new government hopes growth will provide the flexibility to spend more over time.”

For the UK capital markets, the commitment to the fiscal rules will see Labour focus on supply side reform to boost growth and productivity, said Evans. “In this scenario, the election result could be taken as a positive for UK capital markets. Stability and confidence are key. The challenge will be to demonstrate Labour can boost growth while managing a tight fiscal position,” he said. “If it shows progress on these fronts, then confidence from business and overseas investors will build, leading to a positive outlook for the UK economy and market.”

He added that, relative to some other regions, UK equities offered compelling value and now, with a more stable political backdrop, [and] when combined with a rebound in profits and falling interest rates, it added up to a more favourable outlook for UK companies.