What to expect after the election

With the election now days away, polls continue to signal a significant majority for the Labour party. The BBC poll tracker, which takes an average of polls carried out by leading polling firms, currently has Labour at 40%, with the Conservatives on 20% and Reform at 16%.

While Labour’s share has fallen since the election announcement, as we would generally be expected, so has the Conservative’s share, with gains for Reform and the Liberal Democrats.

Polls can be wrong. However, Labour has maintained a significant lead over the Conservatives since 2022. Moreover, the largest historical UK polling error, the gap between the poll share and the vote share was nine points. No party has ever won an election when more than 10 points behind in the polls.

With this in mind, an outcome other than a sizeable Labour majority would not be the expected outcome for markets, and this could have implications for asset prices. A smaller Labour majority of, say, 30 or less, would likely see the new executive reliant on the remaining group of hard-left MPs to pass policies, which could lead to some currency weakness. A hung parliament, with government only possible by coalition or agreements, could also lead to a drop in the pound. In contrast, a sizeable majority is seen as a benign outcome, giving Labour scope to implement supply side reforms that could support growth in the longer term. In the context of UK democracy a “super-majority” is not a particularly relevant concept, as it confers no special legislative powers on the government not available to a party with a smaller majority.

In terms of the policy outlook, party manifestos have done little to change our expectations of what policy priorities will be. Given limited fiscal room and the still-fresh memory of the Truss mini-budget, neither the Conservatives nor Labour propose significant unfunded spending increases.

Fiscal probity remains in vogue. Labour’s manifesto included a proposed fiscal rule that the current budget must move into balance, and debt must be falling as a percentage of GDP by the fifth year of the budget forecast. This doesn’t offer a great deal of room to expand investment spending without raising taxes.

Labour has vowed not to raise key tax rates, ruling out hikes to Income Tax, National Insurance, VAT, and Corporation Tax. This accounts for around three quarters of tax revenue, leaving limited room to raise funds elsewhere. Labour plan to raise c. £7bn a year by 2028-9 by tackling tax avoidance, closing non-domiciled and carried interest loop-holes and making private schools subject to VAT and business rates.

These revenues would fund modest increases in public services spending, such as increasing the number of NHS appointments, recruiting 6500 additional teachers and extending breakfast clubs to all primary school pupils.

However, given that current spending plans assume real term cuts, further spending increases will be needed to avoid cutting spending. Labour identify £1.5bn of efficiency gains in current budgets, which can be reallocated, but more is likely needed. This will have to be addressed by the end of the year, under the Spending Review.

4 - 5 July | The election outcome is likely to become clear from exit polls on Thursday evening, with the result confirmed on Friday. After this, the new Prime Minister will begin making cabinet appointments, which should give a flavour of the incoming executive.

17 July | The King’s Speech, following the state Opening of Parliament, will provide a guide as to immediate policy priorities.

18 July | The new Prime Minister will host c. 50 EU leaders at the European Political Community meeting. This could provide greater clarity as to how the UK’s relationship with Europe could evolve over the next Parliament.

Mid-September | If Labour win, Shadow Chancellor Rachel Reeves has confirmed a budget will be accompanied by Office of Budget Responsibility (OBR) forecasts. To allow the OBR time to prepare forecasts, the budget could not happen before mid-September, but could take place later. This event should provide clarity on the outlook for spending and taxation.

October | In the first 100 days, Labour plan to publish tax and employment rights plans for the duration of the Parliament, to provide businesses with certainty.

December or earlier | The new executive must decide on departmental budgets for Spring 2025 by the end of the year. If no additional funds are allocated, departments face meaningful cuts.

Given how consistent polls have been, markets are pricing in the likelihood of a Labour majority. The market response to this has been benign, with equity flows the main area of interest.

Having been out of favour, UK stocks have enjoyed greater support lately. This may reflect greater optimism around UK political stability, and possibly the outlook for growth longer term, but it also reflects near-term jitters relating to political instability and/or uncertainty in France. UK banks have been the main beneficiary here.

Flows into UK assets have strengthened over the last month. This could continue after the election if a new executive, which could further bolster confidence.

At a sector level, domestic UK names are likely to benefit from a continued improvement in sentiment. Labour has spoken extensively about proposed planning reforms, which should boost the housebuilding sector, though such reform would take time to implement.

On energy and infrastructure, the outlook is more mixed. Labour plan to continue to impose additional taxes on energy companies, potentially going further to reduce investment allowances. In contrast Labour also plan to significantly increase UK renewable generation and storage capacity. The formation of GB Energy, to co-invest on these projects, may boost investment, but the scale is small. Around £25bn would be needed to carry out Labour’s proposals for increasing renewables infrastructure, while GB Energy will be capitalised with around £1.7bn a year.

Whilst we remain alert to the unexpected, a shift in the policy agenda, or a low probability election result (such as a hung parliament), we expect the impact of the election on asset markets to be moderate, with the potential for an improvement in sentiment toward UK assets.

As multi-asset investors, our exposure to the UK is balanced with investments in other regions. As ever, we will continue to pay close attention to global economic conditions, especially in the US and China.

Important information
The information contained in this document is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.