UK equity investors might feel optimistic amid global political turmoil. Labour is expected to win with a significant majority, inheriting a stable post-Brexit economy. UK exports and disposable incomes are rising, and interest rates are lowering. Despite past Labour government market performance, current valuations suggest potential growth.
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By Merryn Somerset Webb
 UK equity investors might be forgiven for beginning to feel a little optimistic. With US and European politics looking increasingly bizarre, Britain is beginning to stand out as a beacon of stability in a volatile world. ___STEADY_PAYWALL___
This week should see Labour winning power with a pretty hefty majority. The consensus has been that this is not an election anyone would particularly want to win, but as the dust of the election clears, the new government should see that they have been dealt a perfectly reasonable hand.
The destabilizing influence of the separatists in Scotland is much muted. The UK’s net trade post-Brexit is rebalancing nicely: We have, as economist Sanjay Raja of Deutsche Bank AG points out, recently leapfrogged France, the Netherlands and Japan when it comes to total exports. The UK is out of recession. Growth was fine in the first quarter of this year (up 0.7% quarter on quarter). The rest of the year should be fine too.
Raja points to real disposable incomes on track to rise around 3% this year as inflation cools and Chancellor of the Exchequer Jeremy Hunt’s last-ditch tax cuts kick in. Both households and companies are also sitting on big piles of excess savings — much built up during the pandemic and still unspent. Think £170 billion ($217 billion) for households and £58 billion for corporates. As interest rates come down, those consumers will get spending and companies should get investing. Overall, says Raja, there is no reason for GDP growth not to run at 1.5% in 2025 and 2026.
That’s not perfect, of course. (1.5% in a country with a fast-growing population is actually a bit pathetic.) But it is at least inviting enough for there to be much chat about the wall of money waiting to pour into the UK once the election is nailed down. In some parts of the market, the wall is already here. In the first six months of the year, says Charles Hall of Peel Hunt Ltd., there were 32 £100 million-plus M&A transactions in the UK market. And 60% of the total went to foreign buyers at an average premium of 40%, something that is definitely drawing global attention. Add it all up, chuck in the cheap valuations in the UK and the prospect of either a Brit ISA or Labour’s promise to “act to increase investment from pension funds in UK markets,” both of which would push up demand for UK equities, and we are surely off to the races.
Cynics will say that we have been here before. Back in 1997, the UK stock market was so intensely relaxed about an incoming Labour government with a huge majority that the FTSE 100 hit a record high on the day of the general election. And why not? Tony Blair had renounced nationalization, dumped the unions and promised he wouldn’t increase income tax. He then immediately handed over interest-rate policy to an independent Bank of England in a gesture designed to make it absolutely clear that, under him, the economy would be properly run. The market loved it — and went up markedly for the next 2.5 years.
On to the note of caution. It all came to rather a sticky end. After peaking in March 2000, the benchmark index lost almost half of its value in the following three years. It then rallied by 80% by mid-2007 — only to again decline by half by the beginning of March 2009. You could have blamed the global financial crisis for all the misery, of course — but as market historian John Littlewood points out, over the same period the London stock market was outperformed by all major stock markets bar that of Japan. By 2010, the market had recovered most of its losses, but New Labour was gone.
In the end, the pattern followed that of all Labour governments since the Second World War. In 1945-1951, 1964-1970 and 1974-1979, the real losses from indices were respectively 8%, 13% and 11% after adjusting for inflation, according to Littlewood. Conservative governments have done better: 1970-1974 was awful (down 11.3%), but 1951-1964 and 1979-1997 were fabulous (74.8% and 166.7%). The latest period of 2010 to now isn’t as good though — if you had bought on the day of the election in 2010 you would only just be evens in real terms.
Ask what goes wrong for markets under Labour governments, and you rarely have to look far for the answer: tax and regulation. In the 1970s, UK stock markets had to put up with things that sound almost ridiculous now — dividend controls being the obvious example. Under Gordon Brown, they put up with a burden of new regulation that (according to the British Chamber of Commerce at the time) added costs to the tune of £77 billion and with policy changes that were seriously detrimental to the stock market. One example from Littlewood: the abolition of advanced corporation tax, a “reform” that introduced an element of double taxation (with the same money paying both corporation tax and income tax) that effectively reduced the value of the dividends paid out by UK companies by 17%.
The next Labour government may make none of the mistakes of predecessors (or indeed of the most recent conservative government). But what it’s inheriting also isn’t as good as that of 1997. The costs of the UK’s legal commitment to net zero will be a drag on growth. Productivity is horrible. GDP per head hasn’t improved since 2017. And the UK’s infrastructure is a mess. All at a time when debt is 100% of GDP.
That means taxes must rise — and if they aren’t going to go up on income (or so says Starmer), they must go up on wealth. Will excess savings pour into stock markets if capital gains tax goes up, if dividends are taxed further or if pension allowances are further capped? As for the foreign money, will it keep pouring into an economy where companies are restricted by high energy costs or reams of new regulation? There might be a hooray for stability driving the UK market on election day and hopefully a good few years ahead based on low valuations alone. But it would be a brave investor who would bet on a Starmer state being the one to break Labour’s postwar negative real-return record.
Read also:
- 🔒 UK’s worst nightmare: Nigel Farage returns to the political fray – Wooldridge
- Nigel Farage takes on corporate wokery: A battle for free speech and the future of capitalism – Adrian Wooldridge
- 🔒 Farage’s Reform Party surges in Clacton, threatens Tory stronghold
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