Key takeaways:
- Political change in the UK is notable, but markets are treating it as a secondary concern, suggesting limited conviction at this stage around immediate economic or policy disruption.
- From an investment perspective, sterling and gilt yields continue to be driven primarily by global forces such as oil prices and US monetary policy, rather than domestic political developments.
- While political change is never welcomed by markets, at this point it is a wait-and-see approach rather than a cause for alarm.
The resignation of Sir Keir Starmer as Prime Minister marks another phase of political transition in the UK, with the country approaching six prime ministers in the decade since July 2016. The next candidate to have a shot at running the country looks most likely to be Andy Burnham, the former mayor of Manchester as well as a previous cabinet minister. While Starmer had won a large parliamentary majority in 2024 it seems he lacked the strong political philosophy to bring the Labour Party together that allows leaders to overcome internal opposition and was further hindered by unforced scandals. From an investment perspective, frequent leadership change can increase uncertainty. However, market behaviour so far suggests that global dynamics remain the dominant influence.
Markets focused on global drivers
While weaker against the US dollar in recent days, sterling continues to trade in a fairly narrow range against the euro, with the pound stronger on the day at the time of writing.1 With gilt yields trading below their highs this year of close to 5.2%,2 markets seem to have been soothed by recent comments from the presumed heir in Andy Burnham on potential fiscal largesse. It is easy to make inflammatory comments when not in power, but there are consequences once you are seen as being able to act as well. In fact, the price of oil and the outlook for the US Federal Reserve still appear to be the primary drivers of both the UK currency and bond yields.
Equity performance reflects structural positioning
The UK stock market has lagged this year, but this is likely as much down to the lack of technology exposure as anything else. Spending on artificial intelligence (AI) has been the dominant theme in global equities, and the UK has little exposure to this. Domestic exposure in the FTSE 250 Index has outperformed since the end of March lows but has failed to push on through June3 in line with markets that don’t directly benefit from AI spending.
Policy constraints and political risk
Looking forward, while the Labour Party may see some reinvigoration from a new leader, there are risks in both directions. It is likely that any reforms may need to target large amounts of government social spending to create some fiscal room for reallocation, a problematic area for any Labour leader. Alternatively, taxes may have to go higher to raise fresh revenue. Lower gilt yields could help by reducing borrowing costs but that may be wishful thinking in the near term as the world deals with another inflation impulse.
Power of brand
If Burnham seeks to reduce spending, he may wish to call a general election to give himself a clear mandate from the public that allows for better control of the Members of Parliament. However, with the Reform Party riding high in national polls and performing strongly in local elections, Burnham might be betting a lot on the strength of his personal brand. This won him the Makerfield parliamentary seat last week to set himself up for the leadership challenge but could be less important nationally. Perhaps this is the most significant risk going forward, one of yet further leadership change in the UK.
The prime minister might be changing, but the issues the UK economy faces remain the same. The next prime minister faces the unenviable challenge of reviving economic growth while walking a fiscal tightrope. Energy policy and welfare reform need to be addressed to reduce the UK gilt yield premia, unlock funds for growth and ultimately attract capital flows back into the UK.
Indriatti van Hien, Portfolio Manager, UK Equities
1 Bank of England GBP spot rates, as at 22 June 2026.
2 Trading Economics; UK 10-year gilt yields year-to-date, as at 22 June 2026.
3 Bloomberg, FTSE 250 Index relative returns year-to-date versus FTSE 100 as at 22 June 2026. Past performance does not predict future returns.
Gilt yields: The interest rate investors receive for lending to the UK government through its bonds.
Fiscal policy: Government policies relating to setting tax rates and spending levels. Fiscal austerity refers to raising taxes and/or cutting spending in an attempt to reduce government debt. Fiscal expansion (or ‘stimulus’) refers to an increase in government spending and/or a reduction in taxes.
FTSE 250 Index: An index of medium‑sized UK companies, often more exposed to the domestic UK economy than larger firms.