Labour’s Landslide Changes Little for Stocks

Editors’ Note: Please keep in mind MarketMinder Europe favours no party nor any politician, assessing developments solely for their potential economic and market impact.

Ladies and gentlemen, we have a winner! And, in our view, a timely reminder that stocks pre-price widely expected election outcomes. Yes, Labour’s landslide in last Thursday’s election left markets unbothered despite commentators we follow warning of tax hikes and other alleged risks.^[i] Seems to us stocks digested all this long ago and are now enjoying the falling uncertainty that we find usually comes as elections wrap. 

Our research shows markets move most on surprises, and Labour’s thumping victory was far from a shock. Polls have signalled it was likely for years—since Boris Johnson was still prime minister (PM).^[ii] They showed it during Liz Truss’s short stint as PM.^[iii] And they continued to do so during Rishi Sunak’s tenure.^[iv] We knew an election was due by early 2025, and most political analysts guessed it would come sooner. Once Sunak put it on the calendar, commentators we follow were mostly concerned with whether a surging Reform Party would siphon enough of the Conservatives’ grassroots support to leave the party with just a few dozen seats.^[v]

In the end, Labour won its biggest majority since 1977, whilst the Tories outperformed worst-case-scenario projections.^[vi] Labour won 411 of 650 seats, followed by the Tories at 121.^[vii] After them, we have the centrist Liberal Democrats at 72, the Scottish National Party down to just 9, Reform with 5, the Greens and Plaid Cymru with 4 apiece and the various Northern Irish and other small parties at 24.^[viii] Sunak moves out of 10 Downing Street, and Labour leader Keir Starmer moves in.

Starmer is a well-known quantity to society—and therefore to markets. He won the Labour leadership post with a centrist agenda and presided over what some in his party’s grassroots described as a leftist purge.^[ix] He spent his time as opposition leader courting business support and positioning Labour as the party of growth and fiscal moderation. Based on our reading, Labour’s manifesto, on the economic front, mostly extended the status quo from 14 years of Conservative rule.

Some commentators we follow argue this is a fig leaf, and that with such a lopsided majority, Labour is about to push all manner of anti-growth policies on the nation. We have seen warnings that the country is set for a wealth tax, higher inheritance or capital gains taxes, a war on North Sea oil production and other policies that will stymie investment, innovation and growth.^[x]

In our view, these warnings are rooted more in bias than reality. Based on our experience in observing financial commentary, most UK investors have long perceived Labour as bad for growth and the Conservatives as pro-market. There are exceptions, of course, but this tends to be the majority opinion we have seen over time. We find reality is a lot more complex. After all, it was a Conservative government that slapped windfall profits taxes on the UK’s Energy sector, hiked corporate taxes (after cutting them earlier in their long rule) and hit households with stealth income tax hikes by not indexing tax bands to inflation.^[xi] It was also a Conservative government that blocked several housing and industrial construction projects to avoid losing rural support.^[xii] We think this record is why Labour was able to market itself successfully as the party of investment and growth.

Even if some within Labour do push for more radical change, we don’t think passage is a foregone conclusion. The party is a big tent, which can make governing more difficult than winning—something the Conservatives demonstrated after their own 2019 landslide. The Tories ended up leaving most of that manifesto incomplete as intraparty divisions blocked legislation.^[xiii] Labour appears to have similar internal divisions, which we noticed bubbling to the surface well before campaigning got underway.^[xiv]

We don’t think it will be lost on Starmer that Labour’s win is less about hearty public support than a split conservative vote. Whilst Labour gained more than 200 seats, its total vote share rose by less than 2 percentage points since the last election, from about 32% to 33.8%.^[xv] Combined, the Conservatives and Reform outpolled it. So the election itself doesn’t seem like a sharp left turn that implies a mandate for major, radical change.

Therefore, we suspect there will be storming debates in Parliament as some Labour members of parliament (MPs) push for more aggressive tax changes whilst others try to tug legislation to the centre in order to avoid alienating voters and becoming a one-term wonder. In our view, this would be a recipe for stealthy political gridlock, repeating the post-2019 scenario with the parties flipped.^[xvi]

In our view, markets have been pricing this election for quite a while—the likely results as well as all the chatter and issues we have seen surrounding them. To us, those seem baked in to prices. Now, over the foreseeable future, we think stocks will likely price how reality goes relative to those expectations. In our view, the relief when the new administration isn’t as disruptive as feared will likely prove bullish, just as it did in 1997, when markets did a-ok as Tony Blair’s huge Labour majority settled in.^[xvii]

Lastly, Britain may be a physical island, but in markets it isn’t—it is one piece of a big global market that tends to pull all its members along in the same direction much more often than not, based on our research. We find global factors are much more influential than local, and this broad global bull market looks likely to us to pull the UK along regardless of its political changes.^[xviii] Just as we have seen in Germany and Italy in recent years, and just as France is now demonstrating.^[xix] We also think markets have a big dose of falling uncertainty on the horizon later this year, courtesy of the US election. We wouldn’t underestimate these tailwinds.