The UK General Election: What’s the Impact?

On May 22, Rishi Sunak announced a general election for the summer of 2024.? There had been weeks of speculation that the election would be held in the autumn, which would have given the Prime Minister at least two years in office and more time for the economic outlook to improve. However, with inflation beginning to fall, Sunak decided that this was the most opportune moment to call the election.

The announcement and the likely Labour victory have caused concern amongst some investors. There is a common perception that Conservative governments tend to be more 'pro-growth' and 'pro-business'. Consequently, investors may be concerned that a Labour government could result in lower UK stock market returns compared to when the Conservatives were in power. However, the historical data doesn’t tend to support that perception. Since 1997 UK equity returns have generally been positive showing little correlation between the outcome of an election and investment returns. The market conditions still seem to be the defining factor, the two highest periods of return coincide with firstly the Tech bubble (Blair, 1997-2001) and the post Financial Crisis recovery period (Cameron, 2010-2015). The markets have also already been pricing in a Labour victory for a while now, at the time of writing the bookmakers have a Labour Majority at 1/20 odds, representing an implied probability of ~95%. This means that a Labour victory is unlikely to shake up markets drastically.

The Investment Committee are not planning to make any changes to our UK exposure based on the election or its outcomes. Our current UK allocation is more?driven by the economic environment and we don’t expect that a change in UK leadership should have a drastic impact on the performance of the underlying holdings.

What can we expect from Labour?

After fourteen years of Conservative rule, it’s natural to worry about how possible regime change in Westminster may affect our investments, but there are areas that may bring comfort for investors. The economic radicalism of the Corbyn era has gone This election differs greatly from 2019 where we had Boris Johnson advocating to ‘Get Brexit Done’ battling against Jeremy Corbyn’s socialist mantra. This time around the Labour Party have had a makeover, disposing the majority of Corbyn’s policies with more of an emphasis on ‘partnership with business’ and engaging with the City.?

Whilst there are still notable differences between the economic policies of the parties, these are much less emphatic than in 2019. Nationalisation has shrunk to just the rail networks when their franchises expire, which has already begun with five operators having moved under state control. Labour have also ditched its promise to commit to ￡28bn a year in green investments due to fiscal constraints. Overall, whilst the details are still fairly unknown the spending seems to be based on sensible goals within the fiscal boundaries.

Fiscal Policy isn’t likely to dramatically change

Shadow Chancellor Rachel Reeves has mirrored a lot of existing economic policy. She has pledged not to raise the most significant taxes – income, national insurance, capital gains and corporation tax and has committed to following a set of fiscal rules basically identical to the current ones. As previously mentioned Labour have dropped their Green pledges due to them not complying. This cautious approach means the election is not likely to change the short-term path of the economy too much or in fact upset the UK Government Bond Market.

Some certainty at last?

Whilst the election announcement was a surprise, it will draw an end to the lame duck government currently in control and provide more clarity on the direction of the UK. This is of course based on a Labour victory, if we end up with a hung parliament we will be facing a different type of uncertainty.

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Copyright, CPN Investment Management LLP, Jun-24

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