UK equities: Labour’s pro-growth plan sparks investor optimism

The possibility the UK will get a Labour government in the wake of the general election (July 4) is all but certain.¹ The potential upshot of which will be political stability, a focus on growth, and the promise of warmer relations with Europe, all of which serve as a boon to UK equities, according to portfolio managers Indriatti van Hien, Andrew Jones, and Laura Foll.

Mood shift

The overwhelming feeling among investors is that UK politics has been a “massive drag” on sentiment towards UK equities, noted Indriatti van Hien, Portfolio Manager, UK Equities. But a Labour government, with a working majority that isn’t beholden to the left of its party represents a “clearing event” for the country, she added.

Kier Starmer’s party is predicted to win a 256-seat majority at the general election, while the Conservatives are on course to record their worst-ever defeat, according to a new poll by global market research and public opinion specialist Ipsos.²

Labour’s promise of political stability contrasts with the volatility of the past eight years under the incumbent Conservative Party, which has seen five prime ministers, seven chancellors and eight business secretaries come and go in quick succession.        

Another major advantage of the incoming Labour government is when viewed in relation to what is occurring politically among its European counterparts, with the UK fast becoming “one of the most stable political regimes” in the region, according to Andrew Jones, Portfolio Manager, Global Equity Income.

Across Europe governments that were in power during the Covid-19 pandemic and cost-of-living crisis are falling out of favour with voters. In France, President Emmanuelle Macron has seen his popularity wane. Earlier this month, Macron announced a snap election in reaction to his party’s defeat by the far right in the European Parliament vote – a move that risks political upheaval and civil unrest.

In Germany, Chancellor Olaf Schultz is also losing favour among the electorate. As of this month, his approval rating stands at 28, down from a peak of 73% in March 2022, according to data from Statista.³

“Arguably, the only European politician that is growing in popularity is the Italian Prime Minister Giorgia Meloni,” argued Indriatti. “Relatively, the UK, from a political standpoint, is looking in far better shape, with that translating favourably, in the world of small cap equities anyway, with the UK currently outperforming European counterparts.”

The Numis Smaller Companies ex-Investment Companies Index (+5.4%) has outperformed the MSCI Europe ex-UK Small Cap Index (+2.8%) year-to-date by three percentage points, as of 30 June, according to Refinitiv Datastream. There is no guarantee that past trends will continue, or forecasts will be realised.

Warmer relations

Labour leader Kier Starmer has pledged to “tear down unnecessary barriers to trade” with the European Union (EU) in his party’s manifesto.

“If the incoming Labour government makes good on its promise to build bridges with the EU, it would be well-received by the UK equity market,” noted Laura Foll, Portfolio Manager, Global Equity Income.

Starmer, however, has been clear that his party is not looking to rejoin the EU, nor the bloc’s single market and customs union. “It will be something softer than all that,” noted Laura.

The only specific measures that the Labour party has committed to include are a new veterinary agreement, increased rights for touring artists, and mutual recognition of professional qualifications.

“We’re going to get stability, but to get to power, the Labour Party have not promised anything new or interesting,” added Indriatti. “In many ways, they have created a rod for their own back for when they do get in to Number 10.”

Growth mindset

At the core of Labour’s manifesto is the promise that it can deliver the sustained growth capable of addressing a crisis in public services in the UK – including the clearing of 18-week-plus NHS waiting lists – without having to raise taxes (income tax, national insurance or VAT) or increase borrowing. A claim many bodies, and most notably the Institute for Fiscal Studies, refute⁴.

“The Labour party is therefore banking on economic growth to funds its plans. This implicitly requires the support of key stakeholders such as the banks and corporates. Labour must know that they need to keep these parties onside,” noted Indriatti.

Labour’s strategy for growth is centred on reforming industrial strategy and planning procedures, with the goal to tackle the fundamental issues plaguing the UK’s economy, notably the alarmingly low investment rates.

While past Conservative administrations have pinpointed the planning system as a barrier to economic progress, they struggled to navigate the deep-seated resistance.

“Labour seem committed to achieving meaningful planning reform and a substantial majority would result in them having the means to drive this through” noted Andrew.

Importantly, Labour could implement some of its planning changes swiftly, especially those related to infrastructure, which is seen as a more critical economic focus than housing development.

Starmer has proposed to unveil new national policy statements for significant national infrastructure projects within the first 100 days of taking power. This initiative aims to expedite planning permissions, a crucial step if Labour intends to achieve its ambitious manifesto goals to increase onshore wind capacity, expand solar power threefold, and quadruple offshore wind production by 2030.

Further, Labour plans to bring back mandatory housing construction quotas for local authorities, and to modify the rules around compulsory purchase orders to simplify and reduce the cost for developers to compile land plots, unleash low quality ‘grey belt’ land from the ‘green belt’.

“If you can put a bit of life back into the housing market, there’s a big multiplier effect on that across the economy,” added Laura. “The stock market has quite a big exposure to house building, and the UK repair, maintenance and improvement (RMI) sector – those are big sectors in the market that would benefit from that.”

Please note: Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.