Markets react to the UK's general election result

“The general election has resulted in a significant political shift for the UK and investors appear to welcome the changing of the guard, judging by how the more domestically focused FTSE 250 got off to a very strong start,” says Dan Coatsworth, Investment Analyst at AJ Bell.

“There is always a sense of nervousness ahead of markets opening the day after a general election, but we only get extreme volatility when investors are caught by surprise. This time round, there was nothing to get heads spinning as the result was widely expected. Instead, investors appeared to welcome the news with open arms.

“Political uncertainty is over and this removes one of the key risks around UK equities, so it’s feasible that more domestic and foreign investors are now looking for opportunities on the market. This suggests today’s reaction might not be a one-day sensation.

“Theoretically, we could see a snowball effect whereby the more the UK market goes up in response to the election, the more people start to get drawn in. There is no guarantee that will happen, but such a response would certainly be long overdue given how UK equities have been unloved since the Brexit vote in 2016.

“The FTSE 250 had a stronger reaction to the 2024 general election result than the FTSE 100 because it has more companies which do business in the UK. An initial 1.8% gain in early trading for the FTSE 250 was the second highest rise for the first day of a new UK prime minister since the mid-cap index was created in 1994. While the market could still move in a different direction as the day progresses, and indeed the index had given up some of those big gains by 9am, the initial reaction is promising.

“It was better than the 1% gain on Liz Truss’ ascent in September 2022 amid investor relief that Boris Johnson was out. However, today’s reaction wasn’t as strong as when Rishi Sunak replaced Truss in 2022, which triggered a 2.8% rise on the day for the FTSE 250. You could argue that was under exceptional circumstances given the chaos that happened under Truss’ short-lived leadership.

“Today’s market reaction is significantly better than the last time Labour took over from the Conservatives in government, whereby the FTSE 250 dipped 0.1% on Tony Blair coming into office in May 1997. That’s interesting given the backdrops are similar for both Blair and Starmer coming into power, namely that it felt like the country was ready for a big change.

“The FTSE 100’s 0.4% gain today is the best market reaction for the first day of a new UK prime minister since the blue-chip index was created in 1984. Driving the market on Friday was AstraZeneca, Glencore and Lloyds, so a broad mixture of sectors and not a full set of pure UK plays.

“Sterling nudged up 0.1% to $1.2776 just after 7am from $1.2759 when the polls closed last night, which is perhaps the result of a weaker dollar than the UK election strengthening the pound. Recent economic data has raised hopes for US interest rates to be cut sooner rather than later and that has pulled down the dollar.

“Gilt yields saw little change on confirmation of Kier Starmer getting the keys to Number 10, which is fundamentally a sign that markets are functioning normally.

“Labour talked a lot about wanting to boost the economy and help businesses during its election campaign. Now comes the hard part and delivering on its promises. Public finances aren’t in the best shape given high levels of debt and it will take a lot of hard work to accelerate economic growth. For now, Labour has a period of grace to settle into office and fine-tune its strategy, but investors can be impatient at the best of times and failure to produce positive results as we move into 2025 could see sentiment start to shift.”

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