UK Election Potential Impact on Markets

With British voters heading to the polls tomorrow, traders are looking for winners and losers among equities as cable appears to have priced in a new Prime Minister at No.10.

The Scenarios

Polls indicate that Keir Starmer will likely become the new UK Prime Minister, as Labor is predicted to win the upcoming elections. Historically, UK equities underperformed when Labour took office at 10 Downing Street. However, analysts note that these market reactions were often due to external factors like the oil market shock or the Global Financial Crisis (GFC). The timing of when the new Prime Minister took office, such as Gordon Brown in 2007 after being Chancellor of the Exchequer, appeared more influential than the new government itself. Studies show the UK stock market performance is relatively similar under the Labor and Conservative administ+rations.

Source: Economics Observatory

The possibility remains that the new ultra-conservative Reform Party led by former UKIP leader Nigel Farage could gain significant support. While unlikely to win given its poor polling ratings are similar to the Conservatives, Reform attracted potential voter interest in excess of the Tories. Many of its supporters are dissatisfied with their former choice of party. Reform appeals primarily to disaffected Conservatives who feel the current government has not delivered, especially regarding issues like housing costs, immigration and Euroscepticism. A small chance exists that Reform could outperform the Tories in parliamentary seats and become the Opposition. As a minority party without power, this status could make interactions within Parliament and with European partners somewhat difficult. Opinion polls suggest Reform will win seven seats.

Source: Survation

The Path Forward for Markets

With Labor widely expected to win the UK parliamentary election by a substantial margin and projected to take 484 seats, markets have had time to adjust. The main focus will be what policies the new government will announce under Starmer. Since Labor plans to largely keep the Conservatives' key policies, it is unsurprising that markets seem ambivalent about the expected outcome.

Labour has taken steps to avoid unsettling markets in light of former Prime Minister Liz Truss' controversial fiscal policies. The pound has already priced in a Labor victory against the dollar, falling slightly. Results aligning with forecasts could cause the pound to decline further. Equity markets also appear positioned for a Labour administration, with the FTSE 100 recently reaching highs, leaving limited upside. Investors will watch how much support Labour pledges for housing, which could boost companies like Barratt, Persimmon and Taylor Wimpey. Conversely, plans to renationalise rail would negatively impact Trainline, First Group and Pennon.

Footsie at Lower End of Range

UK's Footsie appears to be in a period of sideways range, hanging by 8110 at the lower end and 8360 at the upper. A breakdown could see the index decline to the 8000 handle, with 7820 as the next potential support. Reversely, a move above 8360 may initially propel prices towards 8400, with new all-time highs surpassing 8490 should momentum continue.

Source: SpreadEx UK 100

Key Takeaways

As polls predict Keir Starmer will likely become the new Prime Minister, UK stocks and the pound may benefit from political certainty. Historically, UK equities have underperformed under Labour, but market reactions are often related more to external events. Analysts believe the market impact will be modest if Labour maintains the current economic policies overall. While the pro-Brexit Reform Party could potentially outperform expectations, polls show they have limited support. With Labour expected to win a majority, markets have adjusted and will now monitor the new government's impact on housing and utilities.