Barring a polling error of an unprecedented magnitude there will be a change of government after the UK general election on 4 July.

With the Conservative Party at times polling below 20%, and Reform drawing level in some polls with what has been since its formation the UK’s most successful political party in electoral terms, it is very likely the Labour Party will win a comfortable majority.

How to measure the election’s market impact

The impact of the general election is likely to be most clearly reflected in financial market terms through the performance of the pound against other major currencies and movements in gilt yields, which influence how much it costs the government to borrow money. 

If the pound goes up and gilt yields ease, you can assume there has been a favourable outcome. If the opposite happens, then the market will have received some kind of shock from the result.

In UK stock market terms, the FTSE 250, which has a more domestic skew than the FTSE 100, is likely to offer a better reading of what investors think of the election’s implications for UK assets. Sectors like financials, housebuilders and real estate are often the most sensitive to political developments in the UK.

Counter-intuitively, the FTSE 100 may fall in the event of a market-positive result given a stronger pound hits the relative value of its constituents’ dominant overseas earnings.

What is Labour pledging to do in its manifesto and what might it mean?

Tax: Labour has pledged not to increase taxes on ‘working people’ – a deliberately opaque statement. It has been more concrete in saying there will be no increases to income tax, national insurance or corporation tax and pledged to cap the headline rate of corporation tax at the current 25%.

Wealth taxes and increases or extensions in capital gains tax have not been categorically ruled out. An increase in capital gains tax could prompt a wave of selling by investors ahead of its introduction as investors look to crystalise gains at existing rates.

Labour has specifically said it will close the loophole by which performance-related pay in private equity is treated as capital gains. It has also proposed a time-limited windfall tax on oil and gas companies and said it will increase by 1% the stamp duty on purchases of residential property by non-UK residents. 

Stock market impact: will mainly fall on real estate and oil and gas sectors although an increase in capital gains tax could prompt broader market weakness. 

Pensions: Labour has committed to retaining the triple lock guarantee (meaning the state pension rises in line with CPI inflation, wage inflation or 2.5% - whichever is highest) but not gone as far as the Tories who pledged to introduce a new pensioner personal allowance to ensure no-one would pay tax on their state pension income.

Labour has also said it will review workplace pensions to emphasise consolidation and scale and also try to direct investment into UK plc. Given the sums involved this could be much more significant for the UK stock market than the mooted introduction of a British ISA, for example.

Stock market impact: broad if the allocation of pension funds can be shifted decisively into UK stocks.

Other sector impacts:

Gambling: While there has not been a huge amount of discussion about gambling reform during the campaign, in its manifesto Labour talks about ‘reducing gambling-related harm’. ‘Recognising the evolution of the gambling landscape since 2005, Labour will reform gambling regulation, strengthening protections,’ it concludes.

Tobacco: Tobacco stocks may have received a brief respite as the snap election prevented prime minister Rishi Sunak from bringing forward his legislation to ban young people from ever being able to smoke legally. However, Labour confirms in its manifesto it will follow through with Sunak’s idea.

Defence: Labour says it ‘will conduct a Strategic Defence Review within our first year in government, and we will set out the path to spending 2.5% of GDP on defence’. This compares with the Conservatives who have pledged to get to 2.5% by 2030.

Housebuilding: Noises from the industry have broadly been positive on Labour’s plans which include a mortgage guarantee scheme for first-time buyers and reform of the planning system, which many housebuilders complain is an obstacle to building more homes.

However, to be fully prepared, investors should think about what will happen if the narrative does not play out exactly as expected.

As the Brexit vote, Donald Trump’s victory in 2016 and even the recent Indian elections show, it would be wise not to make too many hard and fast assumptions.

Read on to discover what different outcomes might mean and the policies which could have the largest market impact.

Scenario 1: Labour wins a sizeable majority

Strategists at investment bank JP Morgan have already said a Labour government would be a ‘net positive’ for financial markets, predicated on a workable majority being secured. A majority upwards of 50 MPs (meaning 50 more MPs than the rest of the parties in the House of Commons combined) would give investors the political stability they crave after at least eight years of relative turmoil. While it will make a difference in party management terms, it probably won’t make a huge difference if the majority is 50 or 150.

On the other hand, if the Conservatives secure less than three figures in seat terms, as some polls have implied, this may provoke some alarm given a lack of effective opposition and the implications for one of the two major parties in Britain. The Conservatives have typically been perceived as the party of business and therefore market-friendly (even if that reputation has been dented of late by the 2022 mini-Budget and the handling of Brexit). The prospect of a more radical, populist party supplanting or potentially merging with a depleted Tory contingent is one investors may fear.

Scenario 2: Labour wins a small majority

If Labour wins a majority of 50 or less there is a greater risk of MPs with more radical agendas having some leverage and a Labour government introducing policies which bring in more dramatic reforms in areas like housing, environmental regulations and tax. This could have implications for sectors like energy, housebuilding, real estate and financials. Such a result would be taken as a mild negative by markets.

Scenario 3: A hung parliament

A more messy outcome where Labour falls short of a majority but is able to form a government with the support of minor parties, most likely the Liberal Democrats but potentially the Scottish National Party, would undoubtedly be taken negatively by investors. Definitively in the short term, as the potential for instability is digested and effective government is more difficult, and potentially in the longer term too.

If Labour did a deal with the SNP it could raise the distinct possibility of a second referendum on Scottish independence being a condition of its support. This might prolong the constitutional instability which has arguably blighted the UK’s standing among global investors for the best part of a decade. The Liberal Democrats unveiled a tax on share buybacks in its manifesto and could push for this to be actioned in the event the party forms a coalition with Labour.  

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