What Labour's local election 'bloodbath' could mean for your money

The Labour Party’s local election drubbing could create more volatility for investors and uncertainty for households. While prime minister Sir Keir Starmer may be worried about his future, how concerned should you be about your own financial position?

Investors have already seen their portfolios hit by the Iran war and there could be more pressure after Labour lost hundreds of seats in local elections in England, creating speculation that MPs may force the leader of the Labour party out of the top role.

Analysts have warned that the results are unlikely to help gilt yields climb down from their record highs as concerns are likely to remain about the future political and economic direction of the UK.

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"Thursday’s local elections are delivering exactly the bloodbath for Labour that markets had anticipated and, for now, gilts and sterling are taking the results in stride. This calm may prove fleeting, however, as the real story isn’t the results themselves, but what comes next.

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Matthew Ryan, head of market strategy at global financial services firm Ebury, said: "Starmer has publicly fallen on his sword and will face heavy pressure to resign from across the political spectrum, while ambitious cabinet members will no doubt be circling like vultures.

"Betting markets now give Starmer roughly even odds of being gone before the end of June – if anything, we think that this is an underestimation.”

So what does this mean for your finances?

The risk of rising gilts

The Iran war had already been pushing gilt yields up since March due to concerns about high oil prices and the inflationary pressures as well as changing interest rate expectations.

But the local election results introduce new risks.

Ryan added: ”The real danger for markets lies in who could potentially replace Starmer.

“A lurch to the left under Rayner, Miliband, Burnham et al. would likely bring bigger spending pledges, funded by fresh tax hikes and heavier gilt issuance.

“Gilt yields would climb, while the threat of fiscal instability could create a toxic mix for sterling and a feedback loop whereby a weaker currency lifts inflation expectations and drives yields even higher."

It is not just a potential Starmer exit that could cause concerns.

Dan Coatsworth, head of markets at AJ Bell, highlights that a new chancellor instead of Rachel Reeves may also spook bond markets.

He said: “A new chancellor might not have the same patience as Reeves and could rip up her playbook, bringing additional uncertainty for the markets on top of the fact a new prime minister could take the country in a different direction.”

Even the prospect of change can push gilt yields higher, which feeds into other parts of the market, particularly swap rates which are used to price mortgages as well as other types of finance.

Coatsworth added: “Consumers would experience higher mortgage costs and potentially spend less money, particularly if companies scale back hiring should their borrowing costs rise on the back of higher gilt yields, as the two are intertwined. It could also lead to lower public spending and pave the way for tax rises.”

What do the local election results mean for your investments?

Long-term investors technically shouldn’t have to worry about election results.

But Jason Hollands, managing director at wealth management firm Evelyn Partners, suggests it is worth paying close attention to whether any potential rivals to Starmer advocate policies such as wealth taxes, more aggressive redistribution measures, or significant increases in public borrowing and spending commitments.

He highlights that it is important not to confuse the UK stock market with the domestic economy though.

He said: “Nearly three quarters of FTSE 100 company earnings are generated overseas, meaning the largest UK-listed companies are often more influenced by global economic conditions and currency movements than by UK domestic politics.

“That said, domestic political and fiscal uncertainty is likely to increase investor selectivity towards more UK-focused businesses.

“These are particularly more prevalent among the mid-cap and smaller company end of the market where revenues are more closely tied to domestic consumption and business confidence. As higher taxes bite and inflation concerns persist, sectors exposed to discretionary consumer spending, retail, hospitality, housebuilding and energy-intensive manufacturing businesses could prove especially vulnerable.”

Starmer has for now ruled out resigning but as the saying goes, a week is a long time in politics.