UK Assets Are Back in Favor After Labour Victory, Investors Say

(Bloomberg) -- UK assets are back in favor after Keir Starmer’s Labour party swept to a landslide election win, fueling hopes for a period of political calm and a steady approach to the nation’s finances.

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The pound was poised for its longest winning streak in four years, while gilts rose across the curve, outperforming their German and US peers. The FTSE 100 stock index climbed for a third day and the more domestically-exposed FTSE 250 jumped almost 2%, a reflection of improving sentiment toward the country’s equity market.

With the Labour victory largely priced in, the focus now turns to Starmer’s fiscal strategy and whether he can deliver on plans to spur the nation’s economic growth. Investors are particularly optimistic on the outlook for UK homebuilders, given Starmer’s targets to boost construction, though oil stocks could face pressure from possible tax hikes.

“UK markets have been underloved for a while,” said Azad Zangana, senior European economist at Schroders. “This change in political circumstances can help restore some confidence from international investors.”

UK Markets Advance After Labour’s Election Night Sweep

Here’s what market participants are saying about the election outcome:

Thomas McGarrity, head of equities at RBC Wealth Management

“Political stability and the prospect of a centrist government should, we think, be supportive to the UK’s economic recovery and domestically focused businesses over the medium-term. The latter remain cheap and do not appear to be discounting a recovery within their valuations.”

Vincent Mortier, chief investment officer at Amundi

“We view the election results as broadly neutral for UK equity markets given the large poll leads have given stocks plenty of time to reflect this outcome,” he said. “Any equity market slippage or volatility in the wake of the elections may present some opportunities to add to UK exposure.”

Valentin Marinov, Head of G-10 FX strategy, Credit Agricole

“The biggest benefit from a majority Labour government would be the period of political stability that could support domestic investment and, together with the start of BoE easing cycle in August and the continuing growth of real incomes, could foster recovery of the UK economy in the second half,” he said. “This could support the GBP vs the EUR especially if the BoE proves to be less dovish than the ECB in coming months. “

Jon Levy macro strategist at Loomis Sayles & Co

The Labour party’s likely policy path is suggestive of “higher growth and a more favorable asset price environment,” he said. “Gilts for the first time in a long time are looking fairly attractive certainly in a comparative sense. If we we do see that recovery in trend growth it’s probably helpful for sterling too.”

Adrian Gosden, investment manager, UK Equity Income, Jupiter Asset Management

“The whole UK is going to look in a slightly better place,” he said. “If you compare it to what’s going on in France, and what’s going on in America in terms of uncertainty, I think the UK - because we’ve had our election, it’s a massive majority - you can’t say the UK has political uncertainty, because we’ve got five years until we would go to the polls again.”

Laura Foll, portfolio manager at Janus Henderson Investors

“Labour has been very clear about their housebuilding targets,” said Foll, who has been adding to stocks in the building materials sector as a result. If Labour achieves their “ambitious goals” for the sector, “that would be meaningfully positive for the earnings of those types of businesses.”

Richard Flax, chief investment officer at European digital wealth manager Moneyfarm

“The fact that it looks like we’ll have a fairly centrist government removes one of the potential headwinds that we’ve seen in, for instance, France. The key drivers for UK assets will still be the re-acceleration of earnings growth and relatively low starting valuations.”

Christopher Hiorns, portfolio manager at EdenTree Investment Management

Areas with higher public expenditure are likely to be net beneficiaries of the Labour win, he said. “Defense will probably continue to benefit because I think whatever happens, we are going to be spending more given increased political risks.”

Dean Turner, economist at UBS Global Wealth Management

“You’ve removed the tail-risk of uncertainty, but also I wouldn’t underestimate the benefit that UK assets are going to see from just having a period of stability in terms of government and policy making,” he said. “Investors can just focus on some of the more fundamental attractions,” he added. “It’s a cheap market. It’s got exposure to sectors where we should see some pretty decent earnings growth, in particular areas like energy and materials.”

Mathieu Racheter, Julius Baer head of equity strategy

“Following usual election patterns, UK equities are likely moving upwards over the short-term as uncertainty around the election vanishes. While the prospect of a more stable government would be a medium-term positive, we remain underweight UK equities given the overexposure to ‘old-economy’ sectors. We would avoid oil & gas stocks for now given the plans of the Labour Party to introduce a windfall tax for the sector.”

Matt Evans, portfolio manager at Ninety One

“We’re optimistic there’s that stability coming through, that they’ve got the majority they can work with. The medium term will be interesting because that will determine what policy implementations they can really push ahead while keeping those fiscal rules.”

Gerry Fowler, strategist at UBS Group AG

“The UK consumer was already benefitting from strong nominal wage growth, 4% tax cuts for most and utility bills now 40% below the cap last year. Upcoming rate cuts and the Labour policy plans could further support this, particularly in homebuilding where we see value and interest from investors. We like midcaps, consumer stocks and homebuilders in light of these election results.”

Adam Montanaro, fund manager at Montanaro Asset Management

“We see this outcome as much more bullish for small caps than large caps given Labour’s policies are directed to reviving the domestic economy whilst targeting the oil and gas giants, amongst others, as sources of funding for this,” he said. “We see the housebuilders and supply chain players such as Marshalls as key beneficiaries given Labour’s policy implies a near doubling in housing completions.”

Patrick Armstrong, chief investment officer at Plurimi Wealth LLP

“The result was broadly expected, and as we do not expect radical policy changes, markets should not see much movement or volatility on the election results. We expect will look to present growth positive policies in the early days which should support markets, but eventually funding costs and taxes will become a question.”

Chris Beauchamp, chief market analyst at online trading platform IG

“The lack of movement overnight in sterling is a testament to how much of a foregone conclusion this has been,” he said. “The new PM has his work cut out for him, but for the moment financial markets are prepared to give him the benefit of the doubt.”

--With assistance from Alice Atkins, Henry Ren, Sagarika Jaisinghani, Allegra Catelli, Joe Easton, Joshua Gaunt-Warner, James Hirai, Kit Rees, Joel Leon and Anchalee Worrachate.

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