Labour has enjoyed a comprehensive victory over the Conservatives – the largest since 1997 when Tony Blair’s ‘New Labour’ toppled an 18-year Conservative government.
Keir Starmer’s recent triumph mirrors that pivotal historical moment but he faces his own set of challenges. Unlike the late 90s, when the UK revelled in the era of Cool Britannia and Britpop – Keir Starmer grapples with a more complex and demanding political and economic landscape. We take a closer look at what this new government means for the UK economy and your investments.
Market reaction
A Labour victory came as no surprise to anyone. As a result, there’s been very little initial market reaction as investors were prepared for this outcome. What lies ahead is what will drive markets.
The hope is a Labour administration with such a sizeable majority should be able to bring stability and deliver economic growth over the long term.
Off to a good start
Tony Blair inherited an era of optimism and cultural pride and although Keir Starmer’s political outlook isn’t quite as rosy, he has inherited a reasonably stable economic situation. The UK is finally recovering from the impact of Covid lockdowns and the energy price shock that resulted from the Russian invasion of Ukraine. Inflation is also getting under control and there’s hope that households will soon benefit from interest rate cuts.
These factors should boost the UK economy although it’s important to remember that these results won’t be immediately apparent as these factors can take time to impact the economy and stock markets.
Securonomics – a new approach to economic management
Chancellor Rachel Reeves has laid out Labour’s proposed economic management strategy that’s she’s dubbed ‘securonomics.’ Designed to create a bigger role for government in running the free-market economy and greater cooperation with like-minded international allies, securonomics aims to achieve political and economic stability and to drive growth.
During the recent era of free trade and financial liberalisation, it has been politicians that have been heavily influenced by what economists have to tell them. However, abrdn’s Investment Analyst, Tom Watts, believes that with Securonomics – the opposite could now be the case:
‘The state will now choose which areas of the economy are the foundations of economic growth or national security and invest in them accordingly. Think of Adam Smith, the famous Scottish economist who notoriously praised the ‘invisible hand’ of market forces but was still in favour of intervention to protect the British naval industry.
‘Possibly a result of the strain put on global infrastructure during the two-speed re-emergence from the pandemic – securing reliable supply chains will take priority over minimising costs by seeking out cheap labour abroad. The concept of ‘Friendshoring’ – the drive to source goods and manufacturing from so-called friendly countries, within trading blocs, will over time also replace what we know as offshoring now.
‘For investors this could mean that the equities, bonds and currencies of countries that are in such groups and trading blocs, such as the G7 may outperform over the longer term.’
Brexit – building bridges with the EU
Never mind the Channel Tunnel, the Labour government could be building bridges with the European Union (EU), metaphorically of course. The Labour party has fewer Eurosceptic members than the Conservatives did so it’s very likely there will be attempts at repairing relationships. While it’s unlikely there will be renegotiation of the existing trade deal, there is an opportunity to improve relations with the EU. This could even go some way to reducing the Brexit deficit on the UK stock market.
In for a penny, in for a pound
The pound sterling has experienced fluctuations throughout its history, often influenced by major political events e.g. after the 2016 Brexit referendum it plummeted to its lowest level since 1985 – and has been weak ever since. But if the Labour party is able to go some way to rebuilding relations with the EU, this could lead to a much sought-after sterling recovery.
What does the new leadership mean for investors
Reeves has been very clear that ‘Labour is open for business’, keen to demonstrate economic credibility, by surrounding the party with business endorsements during the early stages of the election campaign. Tom Watts believes it’s possible that we’ll see an initial wave of euphoria washing over domestic markets, but over the longer term the result is unlikely to change the UK’s growth outlook:
‘With fiscal space limited, Labour’s first budget will most likely involve shifting the balance of tax and spend, rather than an introduction of outright stimulus. The main planks of Labour’s economic policy has proposed planning reform, green industrial policy and closer relations with the EU. Whilst the house building sector has seen a strong rally on the news, any tangible boost from these measures will take years to materialise.’
While the new leadership has brought confidence to UK markets in the short term it very much has its work cut out if it’s to boost the British economy and stimulate investment in UK businesses in the long term.
Keep track of your investments
For now, it’s a good idea to keep track of economic developments and policy changes and to make sure you don’t put all your eggs in one basket. As always, it’s key to spread, or diversify, your money across different types of investments and geographic regions. That’s because different investments tend to behave in different ways – what causes one to fall can cause another to rise. If this happens, you’re less likely to see the overall value of your investments change dramatically.
Any notable event, wherever it happens in the world, can have an effect on financial markets – something we may well see more of in the lead up to the US Presidential election and beyond. So it’s important to monitor your investments regularly.
If you don’t have the knowhow or the time to effectively manage your investments, then think about options which are managed and overseen by experts.
There's support if you need it
If you’re not sure how the new government could affect your finances, or are concerned about the potential impact on your investments, consider speaking to a financial adviser.
If you’re already an abrdn client, get in touch with your financial planner. If you don’t have an adviser, you can find out more about how our financial planning services can help you.
Remember though that tax and legislation may change, and your own individual circumstances, including where you live in the UK, will have an impact on your tax treatment.
The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on abrdn’s understanding in July 2024.