M&G Investments - Comment on UK elections

• In a year where more people globally will vote than in any year in history, political uncertainty is likely to dominate market headlines and unnerve investors. However political events rarely alter the course of the global economy and/or markets.
• The more fiscally conservative nature of Starmer’s Labour government and its desire to demonstrate stability suggests this election result won’t alter the direction of the UK equity market. But the perception of “change” could encourage investors to revisit the UK market – particularly given the valuations available relative to the rest of the world.
• The incoming government is likely to be constrained by the wider economic environment, poor growth and the need to raise revenue, which will drive tight fiscal policy. On top of this Rachel Reeves and Keir Starmer have, during the campaign so far, put themselves into a tighter spot by ruling out potential tax rises.
• After a period of extended volatility, investors look for a government that can deliver stability and recognise the benefits that private capital can bring to the investment needed in the country. Stability – if delivered – could bring benefits to the UK listed market, and this will particularly be the case if there is upheaval, turmoil or simply uncertainty in Europe and the US.
• We see a Labour victory as bringing some positives for the UK market. Labour has expressed its intention to drive deeper relations with the EU, providing a boost to both GDP and supply. The prospect of closer ties could help to unwind some of the Brexit discount and could be of particular interest to global investors.
• Market opportunities with a Labour government majority per sector:

• Housebuilders - The Labour party has consistently committed to reforming the current planning system, a headwind that has heavily constrained long-term volume delivery and growth for UK housebuilding.
• Energy - Labour is likely to continue to be pro-renewable energy, having proposed a clean energy system by 2030 and an increase in taxation of North Sea oil and gas profits.
• Pensions - The current Labour proposals are likely to be around introducing disclosure requirements around investment in UK equities rather than mandatory allocation to UK assets. We feel this is a positive for the UK equity market in the medium term.
• Auto-enrolment - The incoming government is likely to carefully consider whether the UK population is saving enough for retirement (spoiler: we are not) and may well look at increasing auto-enrolment contributions as a proportion of salary.
• Tax - The personal balance sheets of consumers are in reasonable shape currently but the potential for higher interest payments on mortgages and for higher personal taxation means consumer spend is likely to remain somewhat constrained, albeit perhaps not as constrained as some of the more bearish commentators might suggest.
  
  

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