Impact of Labour's overwhelming win on fiscal markets explained.
The United Kingdom's stock market has shown mixed reactions following the election of Sir Keir Starmer as the Prime Minister in the 2024 general election. The FTSE 250, which has a more domestic focus, has emerged as the clear winner, posting larger gains of 1.10% since the election. In contrast, the FTSE 100, which has a greater international exposure, has been more volatile, climbing by 0.45% and then falling back to level with its previous close.
The FTSE 250's higher return can be attributed to its focus on domestic companies, which are expected to benefit more from a pro-growth and pro-business Labour government. Rachel Reeves, tipped to be the next chancellor of the exchequer, has been vocal in her support for UK businesses.
However, the UK market still faces challenges, such as being significantly undervalued compared to its US and global peers. Economic data, rather than political decisions, are more influential in moving markets, and the prospect of interest rate cuts later this year may have a greater impact on equity markets than a change in Prime Minister.
Jason Hollands, managing director at Bestinvest, believes that with inflation now tamed, a Bank of England rate cut fast approaching, and GDP growth improving, the new government will at least start with some tailwinds behind it. The Bank of England's next meeting is scheduled for 1 August, and most economists expect a rate cut at this meeting or the following one in September. Hollands adds that rates could potentially fall as low as 3% by the end of next year.
The Labour Party, which secured 412 seats and 34% of the national vote, has pledged to cap corporation tax at its current level of 25% for the next parliament. This move is expected to benefit UK businesses, particularly building materials firms and renewable energy infrastructure companies, as Labour has committed to building new homes and investing in the green economy.
Dan Coatsworth, an investment analyst at AJ Bell, suggests that the markets welcomed the news of the Labour landslide due to the removal of political uncertainty. However, Paul Dales, chief UK economist at Capital Economics, cautions that Labour will ultimately need to 'address what looks like an implausibly low projected path for public spending', and potentially raise taxes by more than outlined in its manifesto.
In 2025, the FTSE 250 has shown slight weekly fluctuations under the current Labour government, with small gains and losses but remains mostly stable. For instance, it rose by around 0.2% on one week and fell by 0.1% in another, generally trading near 21,600 points.
In conclusion, while the election of Sir Keir Starmer as Prime Minister has brought some volatility to the UK stock market, the FTSE 250's focus on domestic companies seems to be paying off, with larger gains since the election. However, the UK market still faces challenges, and the government's approach to public spending and taxes will be closely watched by economists and investors alike.
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