British Assets Climb, Mid-Cap Stocks Lead Following Labour Election Win

British domestic-focused mid-cap stocks were the biggest gainers on Friday after the centre-left Labour Party achieved a decisive win in the parliamentary election. This resulted in gains for blue chip stocks, government bond prices, and the pound.

Hopes for economic stability under the new government, following 14 years of Conservative Party rule, boosted the FTSE 250 midcap index by as much as 1.8% in early trading to its highest level since April 2022. The blue-chip FTSE 100 index rose by 0.2%, and the yield on 10-year British government bonds, or gilts, dropped 3 basis points to 4.17%, slightly better than other European markets. Bond yields move inversely to prices.

Labour secured a massive majority in the 650-seat parliament, while Rishi Sunak’s Conservatives faced the worst defeat in the party’s history, attributed to voter dissatisfaction over the cost of living crisis, failing public services, and various scandals.

“A landslide victory provides the sort of clarity and stability that equity markets need in an increasingly volatile world,” said Ben Ritchie, head of developed market equities at abrdn. He noted that businesses with significant exposure to the UK economy, especially those in the FTSE 250 and FTSE Small Cap, stand to benefit.

British home builders were particularly strong, with an index tracking their shares up 2.3%. Aruna Karunathilake, portfolio manager at Fidelity, believes a Labour-majority government will positively impact housebuilders and construction materials by reinstating housebuilding targets and investing in local planning departments to alleviate planning bottlenecks.

Analysts at Goldman Sachs noted that Labour’s policies imply relatively limited changes to fiscal policy but would modestly boost demand in the near term, leading them to raise their forecasts for British GDP growth by 0.1 percentage points for both 2025 and 2026.

British government bonds, or gilts, will be closely watched, especially given the memory of the market chaos triggered by former Prime Minister Liz Truss’ “mini budget” in September 2022. Truss lost her parliamentary seat in Thursday’s election. The new government will need to maintain investor trust while addressing numerous economic challenges, although the stability brought by the election result is seen as a positive for the gilt market.

James Lynch, fixed income manager at Aegon Asset Management, remarked that the election result reduces one of the sources of volatility in the gilt market, providing stability for the coming years. The premium that investors demand for holding gilts over top-rated German 10-year bonds has remained stable this year at around 160 basis points, down from 230 basis points during the mini-budget crisis of 2022.

The focus for bond investors will now turn to the Bank of England, which is expected to lower interest rates either in August or September. The pound rose nearly 0.13% against the dollar to $1.2775 and remained steady against the euro at around 84.72 pence. The British currency has been edging up since Sunak called the election in late May and is the strongest-performing major currency this year, up 0.3% against the dollar. On a trade-weighted basis, the pound is back to its level at the time of the Brexit vote in 2016, reflecting trader and investor optimism that a period of intense market volatility under the Conservatives may be coming to an end.

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