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Tom McPhail, lang cat
lang cat, Tom McPhail

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Markets factor in Labour win – comments from lang cat, Close Brothers and Van Lanschot Kempen

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Today’s news of a landslide victory from the UK’s Labour party, finds that the markets had mostly factored in a widely predicted Labour win.

Tom McPhail, Director of public affairs at the lang cat, says: “Labour has already set out its stall around economic growth – using money from the pensions system to do this, and its planned review of the pensions landscape and reform of workplace provision.

“This may well include reviewing contribution levels for auto enrolment, and revisiting pension freedoms with a greater focus on ensuring people have a guaranteed long-term income.  We can expect significant upheaval in the months ahead though balance needs to be struck between delivering this mandate with the sector’s capacity for change – there’s a limit to how fast things can move. 

“Our own research shows sector wide appetite to press ahead with implementing the legislation (through the Advice Guidance Boundary Review) that will deliver better support and protection for consumers.  Clarity is now needed on direction of travel to provide some continuity to address the long-term challenges involved in providing a sustainable retirement income for all savers.”

Isabel Albarran, Investment Officer at Close Brothers Asset Management, writes that today’s Labour landslide is a welcome development for the UK market.

“Today’s long-expected Labour majority will likely to be welcomed by the UK market, providing a much-needed dose of certainty to the country’s politics. We have already seen an impact ahead of the election, with flows into UK assets having strengthened over the last month, but for this to become a sustainable trend, the UK’s growth prospects need to improve.

“The scale of Labour’s win is remarkable, as is the revival in support for smaller parties, such as the Liberal Democrats and Reform UK. While a significant win for Labour limits the influence of the left of the party, the Conservatives are likely to move to the right, to challenge Reform UK.

“At a sector level, today’s result mandates Labour to implement significant changes, but this will take time. Nonetheless, measures such as proposed planning reforms to the housebuilding sector, increases in renewable energy generation, and the formation of GB Energy will impact markets over the longer term.

“While the immediate market impact of today’s, well anticipated, election result has so far been negligible, policy announcements later in the year could move the needle. Today’s cabinet appointments will give us a first glimpse of the policy agenda, and the King’s Speech later this month will set the tone for the new Parliament, while the European Political Community meeting will give a sense of how relations will go with Europe. Crucially, the Autumn Budget, likely to come in September or later, will give us the best indication of the true impact of today’s result on markets, providing the key fiscal decisions ahead of the December Spending Review deadline.”

Alastair Greenlees, Head of Investment Strategy, UK, at Van Lanschot Kempen, also comments on the not so unexpected Labour win and majority. “The results of the UK general election will have come as little surprise to anyone, with public opinion polls having accurately predicted a Labour majority government after 14 years of Conservative rule. While Labour is not expected to make wholesale changes to policy in the short-term (surprises may still come over the longer-term), the party faces an uphill struggle to achieve its domestic policy aims given the budgetary tightrope it is going to need to walk.

“Elections are a well-known risk factor for markets, just recently we saw volatility in French equity markets following Macron’s surprise announcement of Parliamentary elections and the subsequent vote. Whilst Rishi Sunak’s decision to call an election in the UK was equally surprising given the state of polling, the eventual result has long been priced in by markets. As such, today’s result has not had a discernable impact on markets. UK equity markets have not dramatically fallen, UK government bonds haven’t sold off sharply and Sterling has remained steady vs the US dollar and other major currencies.

“That there has been no immediate reaction in markets to the result does not mean that a strong Labour victory will not impact markets over the coming Parliament. The UK still faces multiple headwinds, with a large deficit and stagnant productivity, particularly in the public sector, both of which will need to be resolved and a pathway found to generate sustained GDP growth if living standard are to rise.

“There may also be sectoral stories in play as well. Labour’s manifesto pledge to build 1.5 million houses over the five-year parliament term, with targets being made mandatory, could provide a boost for the UK housing sector in particular. Conversely, if Labour renationalises key public sectors including water and rail services that could have a negative impact for these UK equity sectors.

“Rachel Reeves, the incoming Chancellor of the Exchequer, has committed to adhering to the UK fiscal rules, as Labour look to portray themselves as a party which can maintain fiscal responsibility. However, it will face significant challenges trying to kick-start a UK economy which has been grappling with sluggish growth in recent years, attributed to a decline in productivity growth, with the lasting effects of Brexit and COVID (amongst others) still impacting on the UK economy.

“Reducing the high government debt to GDP ratio (currently near 100 per cent) and creating fiscal headroom (given the current fiscal deficit) will remain a priority for the incoming Labour government and may prove particularly challenging given it has ruled out making any immediate changes to income tax, national insurance or corporation tax. Labour will likely require out-of-the-box thinking to stimulate productivity growth, with expectations that the party may look to increase additional taxes elsewhere – may capital gains tax be at risk?” Greenless asks.

Turning to pensions, Greenless believes that Labour’s adoption of the ‘Ming vase’ strategy has resulted in their policy for pensions remaining rather vague.

“The party’s manifesto primarily includes a commitment to conducting a wider pensions review upon being elected.”

Greenless lists some of the key challenges as:

“Defined Benefit Schemes – Labour remains broadly committed to prior initiatives (e.g. consolidation) although this is likely to be better understood over the long-term. Labour’s manifesto states that it will “act to increase investment from pension funds in UK markets”, however it remains unclear in what form this will take place. The question remains whether this will be forced upon schemes or only gently encouraged?

Tax – Labour has proposed no changes to the recently removed lifetime allowance (LTA) tax, having shelved previous plans to re-introduce LTA. However, other tax changes remain possible – tax free lump sums, inheritance tax on pensions and/or tax deferral benefits for higher rate taxpayers may be at risk of policy change.

Other savings – Labour has pledged commitment to the “triple lock”, promising not to raise taxes on the “big three” income tax, national insurance or VAT for five years if the party wins the general election. However, it would not match the Conservatives pledge on the “triple lock plus” which promised to raise the tax-free pension allowance in line with the state pension. While a host of other changes may still come, we think it is more likely that these will take place over the longer-term given the various complexities that need to be considered when adjusting the pensions system and lower hanging fruit existing elsewhere.”

Greenless adds that surprises in future policy from Labour or manifesto U-turns will likely result in increased uncertainty and market volatility. “Furthermore, any unexpected future tax hikes may trigger mini-market events. Given the UK fiscal outlook, all of these are possible, particularly later in the cycle; as a result, we anticipate increased volatility over the coming few years.

“It is worth remembering the UK is a part of a larger, global financial system. Of more relevance to global financial markets are this year’s US elections (and the many other global elections this year). These we expect to increase market volatility far more than the result of the UK election. In the US, opinion polls expect the election to be closely contested which will further increase uncertainty over future US policy. Either outcome will likely impact on global markets – given the increasing polarisation of views between the two parties. This, coupled with the current heightened global geo-political tensions means that global market volatility is likely to remain over the remainder of the year.”

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