UK politics has moved quickly. Keir Starmer has resigned, Wes Streeting has backed Andy Burnham, and Burnham is now set to become Prime Minister.
Investors will understandably want to know what this means for the markets. Political change can affect confidence, gilt yields, the pound and the way international investors view the UK.
Periods like this often create a temptation to act. Some investors may want to reduce UK exposure, move into cash, or wait until the policy picture is clearer. That can feel sensible. The problem is that markets rarely wait for clarity. By the time the news feels more settled, prices may already have adjusted.
For long-term investors, the question is not whether politics matters. It does. The question is whether today’s political turbulence should alter the role your investments play in meeting your long-term goals.
This article isn’t personal advice. Remember, investments rise and fall in value, so you could get back less than you invest. Investing for 5+ years increases your chances of positive returns compared to cash savings. Yields are variable. If you’re not sure what’s right for you, ask for financial advice.
Markets will look for credibility
One phrase already being used to describe Burnham’s approach is business-friendly socialism, perhaps even socialism with Manchester characteristics.
That is a neat description. It also captures something important. Burnham’s record in Manchester gives him a different profile from many Westminster politicians. He has shown he can work with business, talk about place and infrastructure, and make economic growth feel practical rather than theoretical.
But markets will soon be looking for more than tone.
They will want to know whether the new government understands the importance of fiscal credibility. Gilt yields matter because they affect how much the government pays to borrow. Higher yields make it harder to spend, invest or cut taxes. Lower yields do not solve every problem, but they can create more room for government to act on its priorities.
That is why early signals are scrutinised. Surrounding himself with experienced economic voices is a sensible step. Markets will still judge the new government on policy, not personnel. But it is a better starting point than pretending market confidence is a side issue.
The UK is not an island for investors
UK markets are affected by Westminster, but they are also affected by global interest rates, the US economy, energy prices, currency movements and company earnings.
Some of the sharpest market moves happen when domestic politics and global pressure collide. The Truss mini-Budget landed when inflation, interest rates and the war in Ukraine were already putting pressure on households and governments. Brexit came during a period when US markets were becoming increasingly dominant.
That is one reason diversification matters. Not just about spreading risk for the sake of it. Rather it is about not being too dependent on one country, one currency, one political cycle or one version of the future.
Investors who hold a diversified portfolio are better placed to absorb political surprises. They are also less likely to make rushed decisions at precisely the moment when political emotions are running highest.
Good companies adapt
It is also worth remembering that companies are not passive. Good management teams do not wait for politics to become calm. They manage costs, allocate capital carefully, invest where they see opportunity and adjust when conditions change.
Some UK companies could benefit if Burnham can rebuild confidence, support investment and create a more predictable policy environment. UK valuations remain low in many areas compared with international peers, and recent takeover activity suggests overseas buyers can still see value where domestic investors have been more cautious.
That does not mean investors should suddenly make a large bet on the UK, nor should they dismiss it simply because its politics is a bit messy. Political uncertainty can create risk. It can also create opportunity when expectations are already low.
There will be plenty of noise emanating from Westminster over the coming weeks and months, not least in who Burnham might pick for the top ministerial jobs, especially Chancellor. Some of this chatter will come to be, but much of it will pass.
The job for investors is not to predict every twist in Westminster. It is to build a portfolio that does not depend on getting every turn right.