A Labour election victory will be a “net positive” for financial markets, strategists at the US bank JP Morgan have said, in an analysis that underlines the appeal of Keir Starmer’s “centrist platform” to the City of London.
A majority for Labour would benefit banks, builders and supermarkets, analysts led by JP Morgan’s head of global equity strategy, Mislav Matejka, wrote in a note to clients published on Monday. The US investment bank said Labour’s policies would be “modestly pro-growth, but crucially with a likely cautious fiscal approach”.
Analysts at MUFG, a Japanese investment bank, separately said that a landslide victory for Labour would be “most positive for the pound” because it would end political instability, raise expectations of higher government spending, and potentially help usher in a more constructive relationship between the UK and EU after Brexit.
Starmer is firm favourite to become the next UK prime minister, according to polls. Labour’s turnaround since the 2019 general election has been marked – including in the ousting of former leader Jeremy Corbyn and the watering down of previous spending commitments. It has also included a concerted, years-long “smoked salmon offensive” by Labour to try to charm big business.
“We believe the market impact will be net positive,” they wrote. “The current Labour party is occupying a centrist platform, and the perception of policy paralysis is set to move behind us.
“Labour agenda is modestly pro-growth, but crucially with a likely cautious fiscal approach. Our economists believe that, given the lack of fiscal space, Labour will likely focus on supply-side reforms to help improve economic growth.”
More than half of the 268 respondents to a Bloomberg News poll published on Monday of readers and users of its financial markets terminal said a Labour win would be the best result for the pound.
Derek Halpenny and Lee Hardman at MUFG wrote last week that Labour’s spending plans were “unlikely to fuel investor concerns”. They wrote that the party is likely to learn the lesson of the Conservative party under Liz Truss, whose premiership rapidly spiralled into chaos after financial markets took fright at unfunded tax cuts. The pound fell under Truss to its lowest ever level against the US at $1.0327, compared with $1.27 on Monday.
Labour has promised to stick to fiscal rules, including not borrowing to cover day-to-day government spending and cutting net public debt as a proportion of GDP over a five-year forecast period. Halpenny and Hardman wrote: “There’s nothing bold here, no shift in fiscal frameworks and Labour are essentially committing to the same fiscal constraints that are in place now.”
Matthew Ryan, the head of market strategy at the financial services firm Ebury, wrote on Monday that the prospect of a Labour government was “actually buoying sterling” in comparison with the euro, which has been hit by uncertainty over how much power far-right parties will control after European elections and Emmanuel Macron’s decision to call a snap election in France.
Broadly, the strategists at JP Morgan favour the domestically focused FTSE 250 share index of medium-sized companies listed in London over the blue-chip FTSE 100, which has more of an international focus.
JP Morgan’s verdict on Starmer’s Labour stands in stark contrast to its dislike of Corbyn’s policies, including nationalisation of several industries. In 2019, JP Morgan said a Labour government “would weigh heavily” on the minds of foreign investors.
Nevertheless, not all big business would welcome a Labour government in 2024, JP Morgan said, citing the promised nationalisation of the train network and proposals to increase taxes on energy companies. Water companies are also likely to face increased regulation, but other utilities could benefit from spending on net zero energy infrastructure.
The pound hit a 22-month high against the euro on Monday as the single currency was hit by Emmanuel Macron’s surprise decision to call snap parliamentary elections in France. Sterling reached €1.1847, for the first time since August 2022.
Macron’s shock move also hit stocks in Paris, where the CAC 40 index fell more than 2% at one stage, and closed down 1.35%. Germany’s Dax finished the day 0.35% lower, after German chancellor Olaf Scholz’s coalition suffered losses in the EU elections.
French bond prices also weakened, which widened the gap between Paris and Berlin’s borrowing costs. France’s 10-year bond yield (the interest rate on the bond) jumped to 3.23%, the highest since last November, up from 3.115% on Friday night.
