According to strategists at the US banking giant JP Morgan, a Labour win in the upcoming general election is predicted to be a “net positive” for financial markets.
JP Morgan’s head of global equity strategy, Mislav Matejka, conveyed in a recent note to clients that a Labour majority would likely benefit sectors such as banking, construction, and retail.
The investment bank indicated that Labour’s approach would be “modestly pro-growth” but with a cautious fiscal strategy, striking a balance between stimulating the economy and maintaining fiscal discipline.
Keir Starmer, the current favorite in polls to become the next UK Prime Minister, has led a significant transformation of the Labour Party since the 2019 general election.
This transformation includes distancing from former leader Jeremy Corbyn’s policies and tempering previous high-spending commitments.
Additionally, Labour has made a concerted effort to engage with big business through a strategic campaign, sometimes referred to as the “smoked salmon offensive.”
JP Morgan is optimistic about the market impact of a Labour-led government. “We believe the market impact will be net positive,” it stated.
“The current Labour party is occupying a centrist platform, and the perception of policy paralysis is set to move behind us.”
JP Morgan
The bank expects Labour’s pro-growth agenda to focus on supply-side reforms to drive economic growth, given the constraints on fiscal space.
Moreover, a Bloomberg News poll reflects similar optimism, with more than half of the 268 respondents — comprised of readers and financial market users — indicating that a Labour victory would be the best outcome for the pound.
Derek Halpenny and Lee Hardman at MUFG noted last week that Labour’s spending plans were unlikely to cause concern among investors.
They highlighted that the party is expected to avoid the pitfalls of the previous Conservative government under Liz Truss, whose tenure was marred by market turmoil following unfunded tax cuts.
The pound plummeted to an all-time low against the dollar during Truss’s brief premiership, but it has since recovered to $1.27 as of Monday.
Labour has pledged to adhere to fiscal rules, such as not borrowing for day-to-day government expenses and reducing net public debt relative to GDP over a five-year period.
Euro Weighed Down By Uncertainty In France
Halpenny and Hardman emphasized that Labour’s fiscal approach aligns closely with current policies, providing a sense of continuity and stability.
Matthew Ryan, head of market strategy at financial services firm Ebury, also weighed in, noting that the potential for a Labour government is “actually buoying sterling” against the euro.
This contrasts with the euro’s uncertainty due to potential power shifts in European elections and French President Emmanuel Macron’s decision to call a snap election.
Furthermore, JP Morgan favors the domestically focused FTSE 250 index of medium-sized companies over the internationally oriented FTSE 100, reflecting its confidence in the local market under Labour’s leadership.
Its positive outlook on Starmer’s Labour differs starkly from its stance on Jeremy Corbyn’s policies in 2019, which included industry nationalization. At that time, JP Morgan warned that a Labour government would deter foreign investors.
However, some sectors may still face challenges under Labour, such as the proposed nationalization of the train network and increased taxes on energy companies.
Enhanced regulation is expected for water companies, but investments in net zero energy infrastructure could benefit other utilities.
In financial markets, the pound hit a 22-month high against the euro on Monday, influenced by Macron’s unexpected call for snap parliamentary elections in France. Sterling reached €1.1839, a level not seen since August 2022.
The announcement also affected Paris stocks, with the CAC 40 index experiencing a notable drop, while Germany’s Dax index declined amid losses in the EU elections.
Bond markets reacted as well, with French 10-year bond yields rising to 3.22%, the highest since November, widening the gap between French and German borrowing costs.
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