What happens next will be fascinating…
As exit polls suggested, the Labour Party won a landslide victory in the UK election, dramatically reshaping the political landscape after the Conservatives imploded following 14 years of rule that became defined by turmoil.
With only two results outstanding, Keir Starmer’s Labour took 412 of the 650 seats in the House of Commons, the most since Tony Blair’s 1997 triumph (second largest since WWII) and a remarkable turnaround less than five years since being trounced at the last election. The Tories garnered 121 seats, their worst ever performance.
However, Labour’s victory was based on the backing of only 34% of voters (the lowest-ever winning share) as the populist Reform UK party led by Brexit campaigner Nigel Farage took chunks of the right-wing Conservative vote across the country.
“This looks more like an election the Conservatives have lost than one Labour have won,” pollster Sir John Curtice told the BBC.
Indeed, as Morning Porridge’s Bill Blain wrote this morning, Labour got 3 times as many seats, but did not win – the Conservatives lost, and lost badly, punished by the electorate. Reform were the real winners – although they only got 4 seats.
The rise of Reform, the UK’s most successful populist party, will be the critical factor to consider in terms of the UK’s future political slant. Addressing the very real concerns of Reform Voters should be at the forefront of all the traditional parties’ thinking and policy decisions ahead of the next election. How do they claim back disaffected populist voters? By addressing their concerns.
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Don’t make the mistake of writing off Reform as solely an anti-immigration party. The real issues, and the reasons it did so well across all the English parliamentary seats is that disaffected Reform voters have:
- Lost confidence in the traditional, conventional politicians and party politics.
- Are mounting a backlash to all the liberal elite themes of wokery, gender politics, diversity and political correctness – which are utterly irrelevant to them.
- They distrust conventional news and media as part of the perceived liberal elite machine, making them fertile targets for fake-news and manipulation. Young angry men are willing to follow role-models like misogynist Andrew Tate. They are susceptible to get-rich-easy scams like meme-stocks and bitcoin.
- Although Reform has coalesced around the same themes as right-wing European parties; the perceived immigration threat and distrust of Brussels, their support is very real and much deeper rooted. It stems from multiple frustrations:
- For many it’s the lack of opportunity, a sense of economic helplessness, and the soaring cost of living that impacts the poor* and disadvantaged, while barely touching the wealthy. In that respect it is no different to Donald Trump’s MAGA which recognised the “Great Divide” in US society between the wealthy and empowered liberal elites and the ignored, decaying small town America.
- For others it’s the sense the Conservative Party no longer represents pride in national and Britishness.
What happens next will be fascinating – will Reform and the Tories evolve into something new, a party of the right that somehow merges traditional conservative values with the demands for economic betterment and anti-liberal stance of Reform? Or will Reform evolve into a party with a full organisational base and executable policies by the next election?
From a markets/economy perspective, Goldman Sachs sees only modest impacts from Labour’s landslide win, providing political stability and marginally higher growth.
A Slight Tailwind for the Economy: Our economists expect Labour’s fiscal policy agenda to provide a modest boost to demand growth in the near term, and have raised their GDP growth forecasts by 0.1pp in each of 2025 and 2026. Firmer demand is likely to result in marginally higher wage growth and inflation. The implications for the BoE would likely be limited, but with risks of slower rate cuts if Labour delivered a sizeable increase in the Living Wage.
Relationship with the EU: Labour has pledged closer UK trade and security ties with the EU to mitigate some of the economic costs of Brexit. Our economists’ analysis shows that UK real GDP has fallen short of that of similar countries—summarised with an estimated “Doppelgänger”—by about 5% since the referendum. That said, our economists note that the near-term gains in trade and GDP are likely to be limited by Labour’s three red lines for its EU policy, including no return to the single market, the customs union or return to freedom of movement. But, over time, Labour could extend realignment of rules to cover more industries to support trade. We think any moves in this direction would be helpful for domestic slices of the UK market, which have performed badly since the EU referendum (Exhibit 1).
Wages: Labour’s pledge to introduce a “genuine living wage” points to the possibility of further hikes in the National Living Wage, but the magnitude remains uncertain. This is probably the source of greatest risk for domestic companies with higher labour costs.
Home building: The Labour Party has committed to build 1.5 million new homes (300k/year) by reforming planning laws. Our UK Homebuilders basket (GSSBUKHO) would be an obvious beneficiary; it has underperformed since central banks started hiking in 2022. And earnings have not recovered from the lacklustre housing market and the shortages in materials / labour (Exhibit 2). A turn in the housing construction market driven by policy impetus combined with rate cuts from the BoE would clearly be supportive; consensus expects 2026 earnings to be 50% above 2024, with an EPS CAGR above 20% in the next two years. That said, even with demand improving, we expect margins to remain an area of caution as input costs remain high (Exhibit 3).
Taxes: Recent media reports have suggested that the party could increase capital gains tax and inheritance tax. In terms of equity implications, we see limited risks from any change in the rate of CGT: (1) 60% of UK shares are held by non-UK investors (who are taxed by their own fiscal authorities); (2) some holdings are not liable for capital gains tax (e.g., ISAs or pensions); (3) the tax applies only when assets are sold; (4) some assets might be sold before any potential rise in CGT and then immediately bought back; (5) the FTSE All-shares is only 20% above its average level since 2010, and a lot of investor returns are dividends that are already taxed according to income tax rates; and (6) we estimate that the CGT liability pertaining to UK-listed shares sold by UK investors each year is probably around £1bn or 0.1% of market cap.
Uncertainty: Perhaps a key element for equities is that this result reduces uncertainty, because we are now past the election, the Labour Party has secured a large majority, and (on a relative basis) because there remains greater political uncertainty elsewhere. The big beneficiaries of uncertainty declining again tend to be the more domestic slices of the UK market (Exhibit 4).
Measures to counter lack of domestic investment in UK equity: Low investment in UK stocks is something we have highlighted and is increasingly gaining attention, given the re-listing of UK companies in the US. In the Spring budget, the Conservative Government proposed a UK ISA, giving a ring-fenced tax-break to investment in domestic shares. In its manifesto, the Labour Party outlined reforms aimed at increasing investment from pension funds in the UK markets and improving the returns and productivity of UK companies.
However, as TS Lombard’s Christopher Granville , MD, Global Political Research, highlighted in a note this morning:
“The Labour Party’s expected big election win lacks the political seed capital typically required to implement the kind of structural reforms that might improve the UK’s long – run economic performance.
The challenge laid down by this result was summed up by the new prime minister Keir Starmer in his victory speech as a “battle for trust” .
This was echoed in the declaration by the incoming Finance Minister Rachel Reeves that investors should now regard the UK as a “safe haven” . Her campaign mantra of stability as the antidote to “Tory chaos” and the key to dynamism may be borne out by an uptick in business investment and consumer confidence on the back of reduced uncertainty. But as the former BoE Chief Economist Andy Haldane has remarked , this kind of “growth fairy” cannot be a sustainable substitute for a growth strategy hemmed in by Reeves’s commitment to stick to existing fiscal rules.”
Which brings us to the last, but perhaps most important fact: turnout was just 60%, the lowest for more than 20 years.
That suggests a rejection of the Conservatives, but also a lingering discontent over the traditional duopoly in British politics.
In his resignation speech, outgoing PM Sunak said:
“To the country, I would like to say first and foremost, I am sorry. I have given this job my all, but you have sent a clear signal that the government of the United Kingdom must change.”
“I have heard your anger and disappointment and I take responsibility for this loss.”
And incoming PM Starmer was managing expectations:
“I don’t promise you it will be easy,” Starmer said in his victory speech early Friday.
“Changing a country is not like flicking a switch.”
