UK general election - outlook for FTSE 100, FTSE 250 and sterling as Labour takes office
What challenges and opportunities lie ahead for the UK economy, currency and stock market, as new government takes office?
UK wakes up to a new government
The UK general election in 2024 resulted in a landslide victory for the Labour Party, led by Keir Starmer. In a dramatic shift from the previous election, Labour secured 410 seats, while the Conservative Party experienced a substantial loss, reducing their representation to just 119 seats. This outcome marks a significant change in the UK's political landscape, ending the Conservatives' 14-year tenure in government.
Result much as expected – market reaction muted
Financial markets had largely anticipated this result, leading to relatively subdued initial reactions. The British pound saw a slight increase against the dollar, continuing its recent upward trend. Gilt yields experienced a small decline, with both short-term and long-term rates easing.
The FTSE 100 index opened higher, with notable gains in construction-related stocks, suggesting some optimism about the potential impact of Labour's policies on the housing sector.
Challenges lie ahead
While the new government faces significant fiscal challenges, there may be opportunities to generate extra funding in the short term through tweaks to the tax system.
The UK economy may see slightly stronger near-term growth and higher inflation under a Labour majority. The mid-cap FTSE 250, more focused on the UK economy than its bigger peer the FTSE 100, may do better in this environment.
In the short-term, a rate cut from the Bank of England (BoE) may deliver a weaker pound, although an August cut is widely-expected. Longer-term, the pound’s fate lies more in the hands of central bank officials in London and Washington than it does in Whitehall.
Overall, while the election result represents a significant political shift, the immediate market reaction has been relatively muted. Markets are now focusing on the economic challenges and opportunities that lie ahead for the new Labour government, including how they will address fiscal issues, stimulate growth, and navigate the complex economic landscape they've inherited.
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