What a new Labour government means for investment in the UK

The British Labour Party won a landslide victory in Thursday’s election, taking power from the Conservatives after 14 years at a time when the country is still facing great economic uncertainty.

Britain’s FTSE 100 index rose 25 points to 8,262 when it opened on Friday morning, with the British pound posting only small gains. The currency was up just 0.06% and 0.03% against the U.S. dollar and the euro at 6:28 a.m. London time, respectively, after little movement on Thursday evening.

UK interest rates remain high as the central bank grapples with high inflation caused by the COVID-19 slowdown.

The two main political parties presented different economic and financial manifestos during the election campaign, which are likely to have different consequences for the investment environment.

For example, Labour’s promise to raise taxes on the pay of private equity fund managers has raised some eyebrows and questions about what this might mean more broadly.

In an interview with CNBC, a group of experts consider the potential impact a change of government could have on investment in the UK.

The arrival of a new Labour government has not yet caused any major changes in markets, but analysts predict that UK assets will become more attractive over time.

Analysts at Jefferies said in a note on Friday that despite concerns raised by a strong showing by the right-wing Reform UK Party, a Labour victory in the UK election would make the country look “relatively stable”.

Jefferies analysts wrote in a research note that, combined with regulatory reform, “this could make UK assets more attractive.”

James McManus, chief investment officer at Nutmeg, told CNBC that in the vast majority of cases, “markets don’t care” about elections. “Historical data shows us that elections and their outcomes rarely move markets when the expected outcome is achieved.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, in a note this week broadly agreed with McManus’ comments but added there could be some impact on the economy.

“A widely anticipated Labour victory in the UK could usher in an era of greater stability for the country… which should help bolster investor sentiment towards the UK,” she said.

The UK political landscape has been characterised by frequent leadership changes in recent years, which has at times led to market turmoil – notably during the short time in office of former Prime Minister Liz Truss.

Some sectors — and therefore specific stocks — could also be hit, Streeter said. Pressure could be added to the utilities sector, as Labour plans to increase fines on water companies, which are already saddled with high costs. Meanwhile, the party’s pledge to boost the country’s defence budget could see UK airspace stocks benefit from extra spending on new technology and equipment.

Plans from all sides to build more homes could have an impact on the property and housing sector, Richard Donnell, executive director of research at Zoopla, told CNBC.

“Investors would welcome this focus on housing,” he said. “Investors want to see a greater focus on housing and delivering the homes the nation needs, and to leverage as much private investment as possible to create an attractive investment opportunity for larger capital and support the ambitions of the new government.”

Hargreaves Lansdown noted that some construction stocks could also see a boost due to Labour’s plans to build new, affordable homes.

But broader economic events will also play a role, according to Nutmeg’s McManus. As interest rates fall, mortgage rates will also fall, which could lead to more people buying or selling homes, he said, adding that it could also have spillover effects on other businesses, such as furniture and DIY stores.

RBC’s head of European capital goods research told CNBC’s Silvia Amaro on Friday that the housing sector could be one of the main beneficiaries of a landslide Labor victory.

“It’s at the forefront, great for housebuilders, great for the wider building supplies sector, bricks,” said Mark Fielding, pointing to two drivers. “Two big drivers: one, the return to mandatory housing targets, supporting 1.5 million new homes over the next five years, which would be a big positive, and two, the hopes of planning reforms, geared towards delivering that.”

This, Fielding said, would enable faster planning processes and potentially additional central government intervention to speed up the issuance of more building permits. Fielding also noted that otherwise investors’ attention would now be focused on Labour’s ability to deliver broader economic growth.

“Ultimately, UK bank shares are one of the biggest indicators of UK economic growth,” he said.

Strategists and economists predict the election will have no major impact on the British pound.

If the results are as expected, public attention will quickly shift away from the U.K. election, strategist Shreyas Gopal and senior economist at Deutsche Bank Sanjay Raja said in a note published Wednesday.

“For EUR/GBP, this means turning our attention to the election across the Channel (in France) and then to the upcoming UK data in mid-July, which will determine whether the Bank of England will be able to make the first rate cut decision in early August,” they said.

There are also “no huge risks” to the pound under a Labour government in the longer term, Francesco Pesole, a currency strategist at ING, told CNBC. Potential renegotiations of Brexit deals would, if anything, be more pro-growth under a Labour government, and the risk of excessive government spending is also low, he explained.

However, Pesole believes the pound may still be on track to survival.

“We see the pound depreciating against the euro over the next 24 months, largely because of our expectations of more cuts from the Bank of England compared to the ECB,” he said. Higher taxes in the U.K. could also weaken its currency — but that’s likely to happen regardless of the election result, according to Pesole.

As Hargreaves Lansdown’s Streeter said in a second note earlier this week, bond markets are not yet reacting to potential new Labour policies.

During the campaign, Labor’s economics spokeswoman Rachel Reeves suggested there could be changes to government borrowing rules to boost growth and investment. But the bond market appears to be focused elsewhere, Streeter said.

“So far, this does not appear to have had an impact on debt markets, with bond investors clearly more sensitive to interest rate speculation than to the new government’s investment plans,” she said.

—CNBC’s Ryan Browne and Ruxandra Iordache contributed to this article.