Should investors be worried about a Labour Government?

Following the announcement made by Rishi Sunak on 22nd May, the UK national election is set for 4th of July. Based on current opinion polls, Labour are strong favourites to win the election by a substantive majority. Whilst recently televised debates between Rishi Sunak and Sir Kier Starmer skirted around the question of how each party will improve the UK economy, we have some views on how a Labour Government could affect UK investors.

As we have already pointed out previously, a Labour government is not necessarily bad for markets. Historically, the difference between the two main parties in terms of market performance has been very minor.

Source: Flying Colours & Refinitiv Datastream

However, markets don’t like uncertainty or weak governments. The UK has had three prime ministers and five chancellors in the past five years. This has harmed the economic mood and increased uncertainty substantively in the past 10 years, from an average of 102 from 1998 to 2014 to 166 in the last decade (lower numbers indicate a more stable economic policy).

Source: Flying Colours & Refinitiv Datastream

Since the Brexit referendum most UK assets (equity and the British Pound) have been trading at a discount versus their fair value.

Source: Flying Colours & Refinitiv Datastream

Specifically, UK equities are much cheaper than their peers, and even though none of the parties want to go back to the EU, Labour has shown an interest in collaborating more closely with their European partners. We believe that this action would trigger the British Pound to rise to its fair value.

Source: Flying Colours & Refinitiv Datastream

Whilst unlikely, based on current opinion polls, the biggest risk would be a hung parliament or a tight majority, as this would place the Labour government at the mercy of the less business-friendly faction of the party.

This could lead to uncertainty and instability, which can have a negative impact on the markets. Historically markets like a clear mandate and performance is negative following a weak government, as indicated in the chart below:

Source: Flying Colours & Refinitiv Datastream

To sum up, markets won’t necessarily be worse off under a Labour government, but the possibility of a hung parliament or a slim majority could create some worry. However, UK assets are very well-priced compared to others and that makes them very appealing to own. A refreshed parliament would also bring more order and hopefully boost investors’ trust in UK assets.

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