Sir Keir Starmer resigns: What could it mean for investors?

The political backdrop

Sir Keir Starmer has announced his resignation as prime minister but will remain in post as caretaker until the Labour Party elects a new leader.

Andy Burnham, the former Mayor of Greater Manchester, appears to be the frontrunner, and with Wes Streeting having indicated he will not stand against him, there’s a growing possibility of what could be termed a “coronation:” a swift, largely uncontested transition. That said, Labour leadership contests have surprised before, and until nominations close, nothing is certain.

The timetable is clear: nominations close in mid-July, with a new leader in place before Parliament returns in September. This is obviously a political event, but it’s one that can have economic consequences.

The chancellor and fiscal stability

Much of what matters for markets will depend on who the new prime minister’s Chancellor of the Exchequer is. It’s understood that Burnham is actively considering retaining Rachel Reeves. His choice matters: the chancellor controls the UK’s fiscal framework, and markets need to believe they will make responsible decisions on spending, borrowing and taxation.

Despite successive economic shocks, the current fiscal framework has established a broadly stable trajectory for public finances, underpinned by fiscal rules designed to keep borrowing on a sustainable path. That framework matters more to the nation’s creditors than the identity of the prime minister.

The framework is not without its tensions, though. The UK’s fiscal plan assumes no major economic shocks – an assumption that recent years have repeatedly exposed as optimistic. It also assumes that taxes will rise as a share of national income as the UK approaches the next election, which is a politically bold position for any government to sustain. Policymakers are, in all likelihood, quietly hoping that the economy performs somewhat better than official projections suggest, creating a little more room for manoeuvre than the numbers currently imply.

The new political leadership will earn the market’s trust by respecting the judgements of the Office for Budget Responsibility (OBR) and the Bank of England (BoE). The country’s robust, independent institutions have become genuine anchors of market confidence. Governments that have attempted to sideline or override those bodies – most memorably in the autumn of 2022 – were swiftly reminded of their importance by the bond market’s reaction. Any future leader, from any wing of any party, will face the same institutional constraints.

The short term: What to watch

Markets have remained broadly calm following the prime minister’s announcement, though sentiment could be tested by pledges made during any leadership contest. Currency markets are sensitive to political headlines, and would be weakened by candidates over promising.

Similarly, gilt yields – the interest rates the UK government pays to borrow money – will be closely watched for any signal that an incoming leader intends to shift fiscal policy. It’s worth noting, however, that other global factors may well dominate the picture.

The gradual reopening of the Strait of Hormuz – the critical waterway through which a significant share of the world’s energy supply flows – is a meaningful development for the UK’s economic outlook. A sustained reopening would ease pressure on energy costs, help the inflation picture and negate the need for costly subsidies on fuel bills like those during 2022. However, the reopening is fragile: it’s slow, could go into reverse, and even a fully reopened Strait is unlikely to handle pre-disruption volumes in the near term. The direction of travel there may well matter more to gilt markets over the coming weeks than anything emerging from Westminster.

Good returns from UK equities are driven by companies, not governments. A change of Labour leader is unlikely to alter that dynamic significantly in either direction.

The single most important variable in the short term is the speed and clarity of the Labour leadership process. If Burnham does emerge effectively unopposed, the uncertainty window closes quickly. A prolonged or fractious contest would extend it.

The longer view

It’s worth stepping back and placing this moment in its proper context.

The UK’s underlying economic fundamentals – the trajectory of interest rates, the path of inflation, employment levels and consumer demand – are shaped by forces that are largely independent of who occupies Downing Street. The BoE sets monetary policy according to its inflation mandate, not the political calendar. Most of the challenges facing the UK economy will confront any political leadership in broadly the same way.

For investors with diversified portfolios, UK political noise is one input among many. Developments in the U.S., Europe, and Asia carry equal or greater weight in determining overall portfolio performance.

Moments of short-term volatility have, historically, created selective opportunities for patient, well-positioned investors. The discipline to hold course – or to act thoughtfully rather than reactively – has consistently been rewarded over time. The relatively high bond yields available over recent months have been attractive investments for many investors.

What this means for you

Political transitions rarely reshape economic fundamentals and this one, with a clear timetable, a caretaker government in place, and fiscal continuity signalled, is unlikely to prove an exception.

A well-constructed financial plan is built with moments like this in mind. Uncertainty is not an aberration; it’s a permanent feature of investing, and portfolios are constructed to help navigate periods of short-term volatility.

Where personal circumstances have genuinely changed – income, time horizon, or appetite for risk – then that’s absolutely a conversation worth having. But it should be a conversation held from a position of considered choice, not one driven by the anxiety of a news cycle. 

We’re here to support you through any questions and concerns. Please don’t hesitate to get in touch.

About the author

Guy Foster

Chief Strategist

Guy joined RBC Brewin Dolphin in 2006 and has previously served as Head of Research before becoming the Chief Strategist. His responsibility covers the investment strategy, providing recommendations on tactical investment strategies to our investment managers and leads the Investment Solutions business.

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