Keir Starmer steps down: What investors need to know

UK Prime Minister Keir Starmer announced on Monday that he will step down, making way for Britain’s seventh leader in 10 years.

The process of succeeding him as Labor Party leader and prime minister will see his successor on September 1 at the latest, and with a new administration comes a new set of economic and financial policies for markets to digest.

Here’s what investors need to know as the UK searches for its next leader.

First, the best.

Andy Burnham is the favorite to succeed Starmer. The mayor of Greater Manchester won the British parliament in a special election last week which made him eligible to become leader.

On Monday morning, former health secretary Wes Streeting, a potential contender for the premiership, endorsed Burnham, increasing the chances that he will run unopposed, which will greatly speed up the process.

Burnham left parliament in 2017 to become mayor of Manchester, after serving in previous Labor governments and challenging the party leadership in 2015.

The prominence the mayor gave him, and his separation from parliamentary intrigue, earned Burnham the nickname “king of the north.”

He is viewed by viewers as left-wing to Starmer, and previous comments about spending have unsettled investors.

“We’ve got to get past this bond market thing,” he said in an interview last September, which triggered a sell-off in UK government bonds, with traders even then touting him as the next prime minister.

He later retracted the statement. “I never said you can ignore the bond markets,” he told ITV News in May.

Writing for CNBC in May, Ian King recalled talking to Burnham – and breaking down his “Manchesterism” approach to economic management.

Freeing government spending from bond market restrictions may be more difficult than Burnham expected, especially as the UK’s financial picture continues to worsen.

The yield on UK bonds, known as gilts, has risen on signs that the government may spend more. If Burnham becomes prime minister, he will inherit a similarly cash-strapped administration, reducing his ability to spend big.

Yield movements may focus on Starmer’s departure, rather than a successor’s policies, April LaRusse, chief investment strategist at Insight Investment, wrote in a note.

“Recently, the gilt market seems to be waiting for an active approach to change in government policy,” he said.

“We expect that there will now be a lot of focus on who can be chosen for key cabinet positions, with the art market very interested in the Chancellor and the potential timing of the next Budget.”

The British pound is unlikely to be derailed by Burnham’s departure from 10 Downing Street because it was “well-anticipated and overvalued,” according to Convera.

“A clearly defined transition would appear to be in order,” Antonio Ruggiero, FX strategist at Convera, wrote in a note.

“The danger lies in the chaotic path. If no timetable emerges and attention shifts to a leadership challenge that could force him to leave, there could be further pressure on sterling.”

Monetary policy is the main concern, as markets expect the Bank of England to keep rates on hold for the rest of the year.

Part of how bond and stock markets react to a new prime minister will be their choice of finance minister, known in the UK as the chancellor. Current chancellor Rachel Reeves may represent a low-risk election by showing continuity, but she is reportedly set to be replaced.

Media reports in recent days have named Streeting, the former health secretary, and Ed Miliband, the energy secretary who led the party from 2010 to 2015, as potential candidates.

“Low-income investors will be quick to judge the new chancellor as either cautious or ambitious,” Dan Coatsworth, head of markets at AJ Bell, said in a statement.

“Bond markets want a cautious brand, and someone who is willing to balance the books. They don’t want someone putting together a spending spree without enough thought as to whether the country can afford it.

“Equity investors will be hoping for a more pro-business chancellor than Reeves, as he has overseen significant cost pressures on UK industry over the past two years.”

A change in leadership does not automatically mean a change in the country’s economic situation.

The International Monetary Fund warned in April that the UK could see the biggest drop in growth since the Iran war of any major economy and is forecasting growth of 0.8% in 2026, down from the 1.3% it forecast earlier this year.

“The Prime Minister may be changing, but the problems facing the UK economy have not changed,” Indriatti van Hien, fund manager of Janus Henderson Smaller Companies, wrote after Starmer announced he would be leaving.

“The next Prime Minister faces the unparalleled challenge of reviving economic growth while navigating a fiscal path. Energy policy and social reforms must be addressed to reduce the UK gilt yield premia, unlock capital for growth and ultimately attract capital flows back to the UK.”