Implications of Labour’s UK election sweep​

The UK’s Labour Party won a landslide victory in Thursday’s General Election, providing new Prime Minister Keir Starmer with the political capital to address the UK’s structural issues, such as weak productivity growth and labor shortages. This clear mandate could brighten the sentiment for UK assets, particularly among foreign investors, we think.​

Labour’s substantial majority increases the likelihood of a two-term government, enabling long-term policy implementation. The agenda is likely to focus on attracting investment, revamping planning reform and boosting productivity, areas where the UK lags peers. Inflation is back down to the Bank of England’s 2% target for now, but the UK’s economy has grown by barely 1% since 2021 – a fraction of the growth of the U.S. economy. Weak productivity and worker shortages are key challenges. ​

The big question: How bold will Labour be in tackling growth challenges given their sizeable majority? The market turmoil after the September 2022 mini-budget highlighted the constraints on fiscal policy from high public debt and interest rates. And Labour recognizes the need to respect fiscal rules – their spending plans amount to an increase of just 0.3% of UK GDP versus the previous government’s spending. ​

Labour’s victory may foster a more cooperative relationship with the EU, with closer partnership on defense given the Ukraine war. And targeted trade agreements could benefit key sectors such as energy and chemicals. Improved EU relations could reduce market uncertainty, support foreign investment and aid the UK’s growth prospects.​

Sterling, the FTSE 100 and gilt yields were little changed following the widely anticipated result. UK equity valuations already reflect the weak growth outlook, with a wide risk premium versus U.S. stocks, in our view. The FTSE 100 – even with its global focus – is up only about 7% this year, compared to the 12% gain for the MSCI World index of developed markets. The more domestic-oriented FTSE 250 midcap index is up about 6% this year. Sentiment around UK stocks could brighten after the election, especially among foreign investors who hold over half of the ownership of UK-listed companies. UK equity opportunities are best captured via an active approach, in our view. ​

We are tactically neutral UK gilts. We closed our overweight earlier this year as markets moved towards our view on Bank of England rate cuts. But we prefer long-dated UK gilts to long-dated U.S. Treasuries on a strategic horizon, as we expect policy rates to fall more in the UK than in the U.S. given the UK's structurally weaker growth outlook.

BlackRock Investment Institute​

The BlackRock Investment Institute (BII) leverages the firm’s expertise and generates proprietary research to provide insights on macroeconomics, sustainable investing, geopolitics and portfolio construction to help Blackrock’s portfolio managers and clients navigate financial markets. BII offers strategic and tactical market views, publications and digital tools that are underpinned by proprietary research

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