A loveless landslide. A sandcastle majority. The narratives surrounding the UK’s general election began to be crafted as soon as the exit poll was announced at 10pm on Thursday night. Anyone watching the BBC’s election coverage could easily be excused for thinking that it was Nigel Farage who would be visiting Buckingham Palace the following morning to accept the offer to form a new government. Labour may have won over 400 seats, but their vote share of 34% was below where the polls had predicted beforehand. The Reform surge, picking up 14% of the national vote, showed that the UK was following the path of its neighbour across the English Channel, where Marine Le Pen’s National Rally party were heading for victory in France’s second round of parliamentary elections (lol).
As ever, we prefer the ‘daft wee laddie’ take. This was an absolute trouncing. A 174-seat majority brings political stability and will enable the Labour government to make reforms in a wide-range of areas where change is arguably necessary. Their share of the popular vote was low, but this reflects both Labour’s strategic priorities (a laser-focus on allocating resources to target seats) and the specific backdrop to this election (Labour’s convincing poll lead leading to the outcome being presented as a fait accompli). We’re unconvinced that there is some latent populist tide waiting to sweep over the UK. In the 2015 general election UKIP received 3.9m votes and a 13% overall voting share. The populist right hasn’t made much progress since then.
While enthusiasm levels are admittedly different (there’s no equivalent to D:Ream in 2024), we think that parallels can be drawn with 1997. In both circumstances, Labour is taking power at a time when the outgoing Conservative government had begun the process of steering the economy in the right direction after a period of turmoil. In the 1990s, John Major’s Conservative government never recovered politically from Black Wednesday but, with Kenneth Clarke as Chancellor of the Exchequer, the economy was recovering strongly when Labour took the reins. Similarly, after dealing with both external (Covid/Ukraine) and self-inflicted (mini budget) crises, Rishi Sunak and Jeremy Hunt have brought stability and are exiting at a time when the outlook for the UK economy is improving. Interest rates have peaked with markets expecting a first cut at August’s Bank of England meeting. Falling inflation and increasing real wage growth is benefiting consumers, with Asda’s Income Tracker suggesting that average disposable income for all UK households has improved by 15% y/y in May, reaching a 32-month high. The risk premia attached to Gilts, which ballooned following the Truss/Kwarteng mini-budget, have normalised and Sterling is one of the few currencies to strengthen versus the US Dollar during 2024. These factors highlight that after a prolonged spell on the naughty step, the UK is becoming increasingly attractive as an investment destination.
With these tailwinds, the Labour government are well-positioned to enjoy a honeymoon start to their period in office. The longer-term challenges that they face are well-recognised - under-investment over a prolonged period has left many essential services stretched to, and often beyond, capacity. These cannot be fixed overnight. There are, though, some things that can be done to improve the outlook for growth in the short to medium-term. Foremost among these is a change to planning policy and it’s encouraging to see that this has been a focus in Labour’s first few days in power. In her maiden speech as Chancellor, Rachel Reeves has reinstated mandatory housebuilding targets, ended the onshore wind-farm ban, and announced a review of previously rejected planning applications that could help the economy. All these measures should help stimulate economic growth.
Within the UK Opportunities portfolio, there are several holdings that should benefit from the successful implementation of these measures. The most obvious are those stocks exposed to the new-build housing market. As new housing starts in the UK have fallen to c.130k units a year, brick-makers have suffered the effects of negative operational leverage. While sceptical that Labour will meet their target of building 1.5m homes over the next 5 years, not least because we doubt there’s sufficient labour capacity, there is still significant upside from current levels. Increased brick demand should lead to increased capacity utilisation, more efficient operational performance, and improving earnings. For context, Forterra, the brick manufacturer, generated c.£90m in EBITDA in 2022, a year in which there was a (fairly mediocre) 180k housing starts. Consensus analyst expectations for 2026 (!) are for EBITDA of £73m – a figure which looks highly conservative even assuming a sizeable lag between changes to the planning systems and actual bricks in the ground. Other holdings like Norcros, the bathroom equipment manufacturer, and Persimmon, the housebuilder, should similarly benefit.
Conscious of the risk of sounding like we’re about to burst into a rendition of ‘The Internationale’, it’s probably worth pointing out those areas of Labour policy that we’re less enamoured by. On energy, we think that extending the Energy Profits Levy and increasing its rate is detrimental to energy security and fails to recognise the role that natural gas will play in the transition away from fossil fuels. The impact on energy giants such as Shell and BP will be de minimis in the grand scheme of things, but it will have an outsize impact on the smaller E&P names. We have reduced our exposure to small and mid-cap UK North Sea oil and gas companies over the past year and it is now less than 1% of the overall portfolio.
If the events of the past decade have taught us anything it is that is difficult to predict politics weeks in advance, far less on a multi-year basis. Some of the risks to our optimistic view are self-evident (US elections/Russia/Middle East) while others will undoubtedly arise wholly from left field. Labour, though, seem well-set to continue, and improve upon, the reputational and financial rehabilitation of the UK that had begun over the last year. This should benefit those companies exposed to the UK economy and ultimately funds like ours.
KEY RISKS
The value of investments and any income generated may go down as well as up in response to general market conditions and the performance of the assets held, and is not guaranteed. An investor may not get back the amount originally invested.
Past performance is not a reliable guide to future results.
Changes in exchange rates may have an adverse effect on the value, price or income of investments.
There is no guarantee that the Fund will meet its stated objectives.
The movements of exchange rates may lead to further changes in the value of investments and the income from them.
There is a risk that any company providing services such as safe keeping of assets or acting as counterparty to derivatives may become insolvent, which may cause losses to the Fund.