What does Labour’s election victory mean for investors? Read responses from Premier Miton’s specialists in equities, fixed income and real estate.
For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
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“Now is the time for Labour to turn its pro-business rhetoric to reality and really kick-start UK Plc”
Head of Equities Gervais Williams:
The new parliament will have a very different composition to the last… but the challenges will remain the same. Specifically, with protectionism (policy of protecting domestic industries), global growth will be patchier, and stimulus costlier – because it will lead to renewed inflation, and hence higher interest rates.
In short, in the absence of a rising tide of debt, it’ll become harder to raise finances. Long-term interest rates have risen already, and in time it may get harder to even find someone willing to lend, as they tighten their criteria.
As it happens, tougher market conditions will suit stocks that are generating surplus cash. In the absence of easy global growth, the innate extra growth potential of genuine small-caps (smaller companies) will have the advantages.
We expect the new Labour government to build on the work of the last government in finding ways for more local capital to invest locally. As it happens, stocks listed in the UK are dominated by equity income companies (i.e. businesses that generate surplus cash), and genuine small-caps (i.e. those with the extra growth potential when the global economy is static).
Hence, prior to the election, the UK stock market had already broken out of its 1999 trading range on the upside.
A new Labour government will no doubt find that many treasury assumptions made prior to the election will turn out worse than expected. But in the case of the UK stock market, they may find things turn out a lot better than expected.
As the new government pushes on in bringing UK capital home to support local assets, in our view they will be pushing on an open door. Introducing the UK ISA for example, may turn out to be a much greater success than they anticipated.
“Plans for growth will be tested by the gilt market”
Head of Fixed Income Lloyd Harris:
We think that Starmer’s plan for growth in the UK will get tested by the gilt market. With full employment in the UK, the only way to grow is to increase wages, unless there are new entrants into the labour market through either greater immigration or a greater necessity to work (less benefits).
With both of these seemingly off the table, then the only outlet can be wage growth, which will keep services inflation sticky.
A microcosm of this is house building. If planning laws are relaxed and more houses actually get built, then who are all those tradespeople that are going to build the houses?
Wages in this sector are set to rise and the cost of building a house will go up. And we’ve not even talked about the unions expectations of greater wage settlements for public employees.
All those doctors will need a pay rise to pay their now taxed private school fees! In short, we think Labour’s plan for growth at a time of full employment will lead to higher borrowing costs in the longer-dated parts of the gilt curve especially (i.e. for long dated government debt), and we prefer short duration bonds (those with a shorter time to maturity).
“The most notable potential impact for real estate: housebuilding targets”
Fund manager Alex Ross:
For real estate, the most notable potential impact from a Labour victory would be attempts to unlock parts of the planning process across the UK, although in practice it will be a huge challenge to deliver the housebuilding targets they are proposing.
We believe their growth policies in a tight labour market are likely to lead to further wage growth pressures and thus restricts the outlook for material interest rate cuts.
This wage growth is positive for a number of more operational real estate sub-sectors where you can capture the cashflow growth required in a higher debt cost environment, as opposed to the bond-like long leased income that worked so well for property investors during the ultra-low rates years.
As such, we see an increasingly positive outlook for rents in the shorter lease areas of the market where there is pricing power, including now in retail commercial property, where pricing power will turn increasingly in favour of the landlord, and where the cashflow growth allows them to perform well in a higher interest rate, higher growth environment.
We also see benefits for active real estate companies regenerating property, where we expect the planning improvements to have a material impact, particularly when converting poorer quality retail commercial property and offices to residential.
