On Thursday July 4^th 2024, the Labour Party won a landslide general election, winning 411 seats in the House of Parliament giving them a majority of 172 seats (just shy of Tony Blair’s majority Labour Party majority in 1997.) This represents a total repudiation of Conservative Party policies, who won only 121 seats down from 365 in 2019 (their lowest since 1906), but with a new labour government not used to governing, how will this affect investors? Experts and analysts suggest that investors are happy with the new government as they feel the United Kingdom now stands for stability, a marked improvement against other European countries such as France. Interestingly, sterling is the only currency within the G10* group countries to gain against the US Dollar in 2024. 

*G10 Group of Countries – Consists of 11 countries being Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland (Minor Role), the United Kingdom, and the United States. Established in 1962 this group agreed to participate in the General Arrangements to Borrow (GAB) which was created to provide the International Monetary Fund (IMF) with additional funds thereby increasing their ability to lend.

A number of investment strategists have suggested that with the Labour party enjoying such a huge majority, and conversely other developed companies undergoing political turmoil, the United Kingdom may well present itself as a political haven. They went on to say that businesses could view the United Kingdom as a known quantity giving them confidence to operate in their particular sectors. There is favourable sentiment regarding Labour’s manifesto promise to overhaul the planning system in the United Kingdom. If such a promise is successful, it should stimulate the economy and give a boost to stocks which have sadly trailed their counterparts in the United States and Europe for the last ten years.

Other commentators suggest that foreign investors may well be interested in Gilts (UK Government Bonds) due to Labour’s cautious borrowing plans as reflected in their manifesto. The suggested period of political stability should make Gilts more attractive after the somewhat political rollercoaster ride. This is following Brexit, and the four Prime Ministers since David Cameron, including Theresa May’s unmitigated disaster towards Brexit, Boris Johnson’s wayward leadership (seriously hampered by the COVID pandemic), the disastrous Liz Truss budget, and Rishi Sunak not being elected by grass roots. Furthermore, a potential Donald Trump victory in the November 2024 US elections, which has been sparked by an assassination attempt on the former president, has resulted in recent swings in the US Treasuries market whilst Gilts have remained relatively stable.

Over the last decade, from a standpoint of productivity and investments, the United Kingdom has played second fiddle and lagged behind the G7* (Group of Seven Nations). Experts suggest that Labour’s growth policies should be implemented sooner rather than later, and it appears that the government is pressing ahead with these policies with great rapidity. The new Chancellor of the Exchequer Rachael Reeves announced that a new National Wealth Fund (NWF) which will promote investments and productivity by expanding on the UK Infrastructure Bank** and the British Business Bank***. The Chancellor further announced that the initial funding will be set at GBP7.3 Billion and will straightaway make investment available to green energy, ports, clean steel and gigafactories.Ahe went on to say, “it would provide a concierge service for investors and businesses that want to invest in Britain, so they know where to go”. It is the labour party’s belief that the New National Wealth Fund will be a public/private partnership in its endeavours and should triple the initial investment of GBP7.3 Billion to circa GBP22 Billion. 

*G7 – Otherwise known as the Group of Seven consists of seven countries, Canada, France, Germany, Italy, Japan, United Kingdom, and the United State of America. Each member’s head of state or government meets annually at the G7 summit along with the EU’s Commission President and the European Council President to discuss such topics as major global issues, especially in the areas of security trade economics and climate change. Lesser luminaries such as high ranking officials of the G7 and the EU meet throughout the year.

**UK Infrastructure Bank – This is state owned (the Treasury) and was set up in June 2021 to aid the Government’s plans on reaching net-zero carbon by 2050 and support economic growth in local and regional sectors of the United Kingdom.

***The British Business Bank – This a state owned (the Department for Business and Trade) economic development bank created on the 1^st November 2014 with a remit to increase the supply of credit to SMEs (small and medium enterprises) as well as providing business advice services. 

As mentioned above, one area which the government hopes will attract private investment is green energy, and to this end Labour wish to make Great Britain a clean energy superpower by setting up Great British Energy. The aim is to have clean energy by 2030 and be an independent exporter of energy so Britain will no longer be shackled by fossil fuels and never again be held as an energy hostage to the likes of President Putin. In order for the government to deliver “clean power”, they will, together with private investment, triple solar energy, double onshore and triple offshore wind energy. In order to support this plan fossil fuel companies can expect Labour to close loopholes in the windfall tax on oil and gas companies.

It appears that the watchword for overseas investors into Great Britain is stability. After the turmoil years of a conservative government, even a semblance of competence, consistency and stability are music to the ears of overseas investors. The bar to please overseas investors has been set very low due to the number of conservative leadership changes plus the somewhat farcical budget offered up by the then Prime Minister Liz Truss. The Labour government have promised to build bridges with Britain’s European counterparts, and with many of their plans for rebuilding the economy centring on lifting growth with supply-side reforms (e.g., simpler planning laws and seed investment into private sector projects), plus a government that will see the country through to just shy of the end of the decade, global fund managers are sitting up and taking notice.

In October 2023 a new methodology to calculate Euribor (Euro Interbank Offered rate) was proposed by European Money Markets Institute (EMMI)*, where the use of “Expert Judgement” to determine the rate would be discontinued. The consultation paper was found to have broad support and therefore from mid-May 2024 Euribor will be calculated on a different basis. The move to the new calculation will be implemented in a phased manner where panel banks** over a period of six months will be migrated to the new methodology (transaction based) one by one.

*European Money Markets Institute (EMMI) – Along with the introduction of the Euro the EMMI was founded in 1999 by the national banking associations of the Member States of the European Union. The EMMI is an international not-for-profit association, facilitating the smooth functioning of the euro money markets. In July 2019 the EMMI was granted an “Authorisation” by their supervisor – The Belgium Financial Services and Markets Authority (FSMA) – for the administration of Euribor under BMR (Benchmark Regulations of the European Union)

** Panel banks – These are banks (19 banks with top credit ratings and ethical standards) from across Europe that have a place on the panel of the administrator of Euribor (EMMI) for contributing Euribor submissions which are eight different rates based on loans with maturities from one week to twelve months. 

The underlying or core reform dismantles the requirement for panel banks to provide bespoke estimates in certain or unusual circumstances when actual borrowing or lending does not take place. The move will also potentially allow for more banks to contribute to the Euro benchmark which is of course utilised in many products from car loans to mortgages which is valued in the trillions of euros. There are currently three levels that determine Euribor, as outlined below.

·      Level 1 – This consists of contributions based solely on transactions in the underlying tenor (Interest rates for 1 week, and 1, 3, 6 and 12 months), from the prior Target Day, using a formulaic approach provided by the EMMI.

·      Level 2 – This level is divided into three separate or sub-levels,

·      Level 3 – This consists of submissions based on transactions from a range of markets closely related to the unsecured money markets. Each panel bank uses specific data and tailor-made modelling techniques depending on their own funding models.

The new methodology is intended to reduce the operational burden on panel banks who’s current approach is to develop internal processes including a framework for governance for making presumed Level 3 submissions based on expert judgement. Level 3 will, under the new methodology, be scrapped saving panel banks millions of Euros in the costs of meeting this level’s requirements. However, this means that level 2 will be expanded to include additional banks and from a technical standpoint enlarging the starting point of its calculation and redefining the Market Adjustment Factor (MAF) to better reflect perceived credit risks and changes in interest rates. The MAF is calculated based on changes in the closing prices of the ICE (Intercontinental Exchange) Euribor futures contracts for the quarterly months.