Investing.com - The U.K general election has resulted in a landslide victory for the opposition Labour Party, and UBS takes a look at the likely consequences of this result.
As of 04:40 ET, Labour, led by Keir Starmer, had won 411 of the 650 seats in parliament, giving it a large majority with a handful of seats yet to declare, ending 14 years of often turbulent Conservative government.
With the election out of the way, the focus is likely to shift to the fiscal outlook, said analysts at UBS, in a note.
“We continue to view the fiscal outlook as the key post-election risk. Given relatively modest spending pledges (c. 0.4% of GDP p.a.) outlined in the manifesto and very tight fiscal space, we see limited risk of large fiscal giveaways in the near-term,” UBS said.
However, given the Labour commitment not to reverse the recent income tax cuts and spending pledges outlined in the manifesto as well as potentially hard to achieve revenue targets, the uncertainty around the medium-term fiscal outlook is likely to persist.
“As regards the growth and monetary policy outlook, we do not see any immediate implications from the election.”
The key risk for the post-election period refers to the fiscal outlook, with the room for big fiscal giveaways looking very limited given the narrow fiscal headroom after the Spring Budget and Autumn Statement.
“Given Labour's commitment not to reverse the recent income tax cuts and additional spending pledges amounting to c.0.4% of GDP p.a., as well as potentially hard to achieve revenue targets, the risk around the medium-term fiscal outlook is likely to persist,” said UBS.
The market-moving event should be the first Labour budget, which should shed more light on the new gilts funding remit.
“We see limited risks of fiscal slippage in the near term, but fiscal concerns are likely to persist over the medium term, leading to higher term premia and steeper curves,” UBS added.
The Swiss bank remains constructive on the pound and has revised its EUR/GBP end-Q3 forecast lower to 0.8400, while still holding a bearish GBP/USD year-end 1.25 target, in line with our constructive view on the USD.
“The core reasons that underpin the view, namely attractive carry and expectations that the election will portend a lengthy period of political stability at a time when political risk is on the rise in Europe and the US, are still intact,” UBS said.
Turning to equities, the U.K. markets remain heavily discounted versus other regions with the small and mid caps, in particular, still priced at the same discount they developed after the Brexit referendum despite recently returning to double digit earnings growth.
Companies with U.K. sales exposure, the FTSE 250 index of small and midcaps, consumer oriented stocks and homebuilders specifically are all appealing investment opportunities in our view, the bank added, and few of the stocks in these lists have moved materially yet - perhaps unsure of the delivery and timing of the more supportive policies even though the trends are in place already.