Election result puts UK assets back in favor

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. 

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.

“Markets are going to be pleased with the result,” said Michael Field, European market strategist at Morningstar. “It means stability.” 

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

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.”

Lindsay James, investment strategist at Quilter Investors

This election might be remembered as one where, chastened by the impact of the Truss/Kwarteng budget, the average politician became vastly more conscious of the fiscal deficit, the debt to GDP ratio and the ultimate fragility of the gilt market. Whilst likely to act as a break on future borrowing, it also makes their job of delivery an awful lot harder as a result.

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.”

Morgan Stanley strategists led by Bruna Skarica

“Markets will likely focus on the fiscal newsflow, and what any coming fiscal announcements mean for the Bank Rate path. On the whole, we think that incoming data prints will be a more significant driver of GBP and rates in the near term.”

Jamie Searle, strategist at Citigroup Inc.

“Some further revenue increases are likely to come at Labour’s first fiscal event. This will likely weigh on growth initially before driving lower rates and more public spending enable a robust improvement in the economic trajectory from 2026 onwards.”

David Chao, a strategist at Invesco Asset Management in Singapore

Fiscal prudence is set to dominate as the new government might not be willing to undermine the market confidence,” he said. “Inflation is likely to remain close to 2% until winter when it will temporarily re-accelerate. In the near term, higher spending may make the BOE more cautious regarding the pace of rate cuts.”

Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank Ltd.

There is “palpable relief of a stable government after a long time, as less tenuous political sway and policy clarity is a cause for optimism.” But the optimism may be contained “given the magnitude of the challenge involved in economic revival amid heightened geopolitical risks and elevated monetary policy headwinds globally.”