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Election day is a busy time for the Asset Allocator email inbox, as we sift through an avalanche of press release comments on the financial sector’s hopes, fears, wants and needs for Keir Starmer’s new government.
Now the dust has settled somewhat, we sought to figure out what this could mean for the much-maligned UK stock market, which has been more or less battered since the Brexit referendum in 2016.
The new Labour government has been largely welcomed by the Square Mile – in part down to chancellor Rachel Reeves’s campaign to convince executives of the party’s economic competence.
More proof of this emerged on Friday morning as the City of London and Westminster constituency (which includes other wealthy districts like Knightsbridge, Belgravia and Westmister) voted Labour for the first time in its history - though most of the people who work in the City will live and vote somewhere much leafier.
But the overall mood among fund managers and DFMs alike was broadly that of quiet optimism – many of whom are hopeful about the prospect of turning the UK’s listings crisis around and encouraging flows both domestically and abroad into decent British companies.
Stability is key
One thing we picked up from the industry is a relief that the UK could be headed for a period of stability.
All of a sudden, Britain looks like a safe haven when compared to France, as managers of European funds struggle to interpret the volatility surrounding the election across the Channel.
“In recent weeks and months there have arguably been more unexpected turns in elections around the globe, causing more rather than less uncertainty – and that’s before we get to the upheaval of the current election in France and the uncertainty of which Democrat will face Trump in November,” said Paras Anand, chief investment officer at Artemis.
“All this could mean the UK, from being a poster child for political instability and volatility around economic strategy, could increasingly be seen as a bastion of relative stability.”
The flow show
A period of relative calm could encourage a more welcome environment for overseas investors, who have largely pulled away from the UK in recent years.
This could spell good news for our DFMs which allocate more significantly to the UK within their portfolios.
RC Brown, based in Bristol, holds a hefty 39.5 per cent weighting to UK equities in its balanced proposition, and we caught up with head of managed funds Glenn Meyer for a quick pulse check on what he’s hoping for this year.
“Overseas investors may well sit on the sidelines for a short while until there is evidence that the new government's growth plans are indeed properly funded and are achievable,” he said. “But if it can be shown that borrowing for growth can deliver long term benefits then flows from abroad are likely if the UK starts to close the productivity gap with places like the US, which may be a big ask.
“The problem is the UK equity market has been unloved for some time so new capital will have to be raised at attractive terms to bring in money from abroad.
There has been an appetite for overseas private equity investors to bid for UK companies, with a more stable political background foreign equity investors may start to dip a toe in the UK equity market.”
As we covered not long ago, RC Brown’s UK exposure consists of nine active UK funds, plus the SPDR FTSE All-Share. You can read more about that, here.
High hopes
Despite the mood of optimism, Reeves’s in-tray will be almost overflowing when it comes to reforming the UK’s investment landscape.
“While the City is comfortable with a Labour government, it too will want to see substantial and concrete plans to reinvigorate the London market,” said Lindsay James, investment strategist at Quilter Investors.
“Labour governments have not been considered natural allies in the past, but the demise of the London market will require it to give it some sort of stimulus, especially if it wants growth to return to the economy. Getting more businesses choosing to list in London would be a positive start, but a lot needs to be done to also prevent companies currently listed here moving elsewhere or going private.”
Our DFMs will certainly have one eye on her strategy for stemming the tide of outflows that have consistently upped sticks from the UK.
Last month we reported that large-cap UK equity funds experienced £2.4bn of net outflows in May 2024 alone – with over £12bn being pulled over the year, according to Morningstar Direct.
If green replaces red in monthly flows data, then that can only be considered a good start.
