Columbia Threadneedle: Labour victory good news for UK equities
Columbia Threadneedle: Labour victory good news for UK equities
Toby Bush, UK Equities analyst at Columbia Threadneedle Investments, comments on the Labour Party's election victory and what it means for the UK economy and financial markets.
'Investors are likely to respond well to a new the political stability in the UK following the Labour victory. This should result in a reappraisal of UK equities, which are still out of favour despite the surge in M&A activity this year. We expect UK companies to remain attractive targets for overseas takeover and private equity bids as the intrinsic value of these businesses is much higher than implied by current beaten-down share prices. Indeed, the UK market is deeply discounted relative to its own historical averages and the rest of the world.
After a tough run for the UK economy, there is now cause for optimism. A range of forward-looking lead indicators are moving up. Inflation is coming down reasonably rapidly, reaching the 2% target in May. Hopes of an August rate cut have been boosted, particularly as the new government is unlikely to introduce any significant tax or national insurance cuts given the UK’s large fiscal deficit and elevated levels of government borrowing. Historically, UK equity market performance is strongly correlated to rate cuts.
Strong wage growth has resulted in the savings ratio increasing. The strength of household balance sheets has supported the economy with real household disposable incomes rising, even before any rate cuts, and an upward revision to household consumption.'