The Pure Gold Company

The market reaction to the election has been calm. Labour’s large majority provides political stability and unity, and the ability to enact economic policies efficiently and decisively. So, what is a new Labour government likely to mean for your investments?

Why the large majority is important

Labour won the largest parliamentary majority in a century, and this means it can push ahead on its plans without needing support from outside the party, and it is also more likely now to remain in power for two terms. This allows ministers to plan for longer-term policies, and importantly so can the rest of the country.

Knife-edge elections destabilise the economy and create uncertainty among businesses and consumers. In the run-up to the 2024 elections, a Labour win was largely seen as a fait accompli. But while the victory was expected, it is still just as comforting for both businesses and consumers who have faced a lot of instability over the last five years, including four prime ministers, one of whom only lasted 50 days.

Labour’s economic policies

The focus of Labour’s economic policies is to stimulate growth, encourage stability and support innovation. It will do this by capping corporation tax at 25%, making targeted investments in clean energy and encouraging economic growth outside of the capital, among other measures.

These plans are unlikely to set the markets alight, but there will be relief that these pledges have moved to the centre of the political spectrum since the very left-wing Labour policies of former party leader Jeremy Corbyn (whose nationalisation and corporate tax pledges would have had severer repercussions for the equity markets).

Labour meanwhile has the legacy of a lingering cost of living crisis and high interest rates to contend with. If the economy begins to right itself, interest rates could come down, loosening pressure on the property market which will also benefit from an election pledge to increase housing.

Assets and taxes

Economic growth is good for investors, most of whom have some of their assets in stock and bond portfolios. If Labour can coax the UK economy out of the sluggish growth pattern of the last few years, it should help buoy businesses and markets and encourage investment.

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Photo: Royal Mint

But while supporting business investment and avoiding swingeing tax rises may placate the Labour sceptics to some extent, ultimately economic policies come at a price. Investment requires tax takings, and the Labour manifesto has been clear about what they won’t do, including not raising corporation tax or income tax. But sometimes what is not said speaks just as loudly. Labour has said its spending plans are fully funded, but would not rule out an increase in capital gains tax, leading to speculation that this could be increased. There is also concern about the possibility that pension thresholds and inheritance tax may be tightened, to the detriment of the asset-rich.

Financial Markets

The markets have largely been on an upward trajectory coming into the election. The FTSE 250, which consists of mostly UK-focused businesses and can act as a litmus for optimism about the UK economy reached two-year highs following Labour’s victory. Bond markets have been subdued, which is exactly how it should be. The bond market rout that followed Liz Trusses mini budget in 2022 is still a painful memory for many investors so no news is good news in this case. Labour isn’t going to set the markets alight, but there is a mood of optimism that has so far underpinned the stock and bond markets in the UK.

Elections around the world

While the UK may be basking in its new-found stability, elections in other parts of the world are impacting international stocks and assets, often to their detriment. The French election has resulted in a hung parliament, the complete opposite of Labour’s landslide, and there is now substantial uncertainty about both the outcome of coalition negotiations and the ability of a government split three ways to pass legislative bills.

In the US meanwhile, the looming November elections are already having an effect on the markets and the economy. Growth may be slowing, and the uncertainty over the political and economic direction of the country will likely lead to worried consumers and cautious businesses.

More than a billion people have already voted around the world and many millions more are going to the polls. All of these elections add a layer of instability to the powder keg of global politics.

Protecting your assets with gold

The new Labour government has pledged far more centrist policies than those touted five years ago, but there are still areas of personal wealth that could come under scrutiny in the new regime. Capital gains tax, inheritance and pensions have all been raised as possible ways for the government to fill the coffers, and investors are already reacting to this by selling assets.

This trend is evident in the rising demand for gold at The Pure Gold Company. In the week before the election, gold demand rose 43%, with some clients specifically citing the possibility of a rise in capital gains tax as the main motivator of their purchase.

Gold coins, minted by the Royal Mint don’t attract capital gains tax depending on individual circumstances, allowing investors to sidestep any rise.

Alongside tax advantages, gold is also a safe-haven asset which tends to rise when other assets fall so is often used to diversify risk. Diversification is one of the best ways to protect your assets during periods of volatility, especially if, like during an election, it is expected. The UK election may have produced a stable outcome, but markets are global by their nature, so instability there can affect assets here. Including safe-haven assets like gold or silver in your portfolio can help protect your wealth, whoever you chose to vote for.

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