Quarterly Commentary Winter 2025

Thank you to all at Henderson Rowe for the opportunity to provide my humble contribution to your quarterly outlook. My business, BlondeMoney, analyses the unpriced risk in financial markets. This is often, but not always, political risk. We strive to provide unique insight into the worlds of Westminster and the City. I’ve had a foot in both, having been an adviser to George Osborne during the banking crisis as well as working for investment banks and as a fund manager. Prior to this, I graduated from Christ Church, Oxford with an MA in Politics, Philosophy and Economics. I’m a Fellow of CFA UK and Freeman of the City of London.

Politics and Risks in 2026

Keir Starmer’s premiership is already over in all but name; Westminster is merely waiting for the excuse to say so out loud. Within the Labour Party, this reality has hardened into something approaching panic, with the search for a trigger event, the proverbial last straw, already under way. Waiting until after the May elections would be a strategic error. By then, the damage to Labour’s authority and internal discipline may be irreversible. A low‑grade cold war inside the party, long tolerated in the hope of stability, has reached the point where it must be resolved quickly and decisively. Otherwise, the greater fear for Labour – that they might not only be thoroughly beaten but potentially eradicated by a thumping Farage‑led government – will become ever more likely.The year begins with the once‑confident Labour government perched precariously, confidence indicators sagging, backbench restiveness growing, and a leadership transition likely before the summer. The configuration of that transition, and the signal it sends to markets and global partners, will shape investor sentiment and fiscal forecasts well beyond Britain’s shores.

1. Starmer’s Waning Authority: Why the End is Near

For much of his time as leader of the Labour Party, Sir Keir Starmer was positioned as the antithesis of the tumult that characterised Conservative governments of the prior fourteen years. He promised stability, competence, and discipline. The self-proclaimed son of a toolmaker and former Director of Public Prosecutions would be a rather dull but capable managerial leader for uncertain times. Instead, the narrative has shifted.

From freebies to u-turns, from broken manifesto pledges to leaky tortuous budgets, Keir Starmer has presided over the most precipitous decline in support for a government in modern times. The latest polls put the Labour Party in third place, having lost half of its vote share since the general election at which it won a landslide majority. Haemorrhaging supporters to both its left and right flanks is proving an insurmountable political challenge for a man who even tacitly admits the job is beyond him. At his latest appearance in front of parliament’s powerful Liaison Committee he acknowledged “my experience now as Prime Minister is of frustration”. He mimed pulling a lever as he complained how “the action from pulling the lever to delivery is longer than I think it ought to be”. He said almost exactly the same a year earlier, suggesting more time in the role is not yielding better results.

And yet we start a new year with the same occupants in Downing Street. This has led to the lazy assumption that a Labour leader cannot be displaced because incumbency is inherently stabilising. This is incorrect. The Labour Party has every procedural means to force a leadership contest, and on the basis of recent leadership and deputy leadership elections, the process could be completed within six to eight weeks.

Labour’s internal rules were amended in 2025 to allow leadership challenges at any time rather than only at annual conference, dissolving what was once a significant barrier to change. The hurdle that 20 per cent of MPs must back a challenger is not especially onerous, as evidenced by the 316 MPs who quickly declared their public support in last autumn’s deputy leadership contest. That took place in the wake of the sudden departure of Angela Rayner. She resigned on 5th September 2025 and within a week MPs had made public their nominations for their choice of replacement deputy leader. Six weeks later, the results were announced. The machinery of change is now in place.

Some of the reticence to start the process comes from the fact that the rulebook states “The sitting Leader shall not be required to seek nominations in the event of a challenge”, meaning Starmer can remain on the ballot. This is what provoked the message from Downing Street sources last November that “allies of the prime minister are making it clear he would fight any challenge”. In other words, moving against the PM would not necessarily take him out in a clean strike, as Labour members might keep him in post by voting for him in the eventual ballot. This would be a pyrrhic victory, as former prime ministers can attest. Once you crystallise the quantum of your opponents, your authority is weakened beyond repair. Margaret Thatcher won the first round of the leadership contest that ultimately saw her out of office nine days later.

There are also weapons available in the process that exist beyond the rule book. In 2016, Labour MPs voted overwhelmingly 172 to 40 that they had no confidence in their leader, Jeremy Corbyn. Corbyn simply responded that that ballot had no “constitutional legitimacy” as it was in no way binding upon him. He ploughed on into the following year’s snap election. Those years were bruising for many Labour MPs and Labour Party members, reinforcing the sense that Starmer might be able to survive. But there is one key difference in the current environment: the leader of the Labour Party is also the prime minister. Machinations against Corbyn were largely irrelevant as he was simply leader of an incoherent opposition. It’s simply not sustainable for the head of the government to continue in post when less than one-fifth of voters support his party and his working majority in parliament has all but evaporated.

This is uncharted territory for Labour. Since its founding at the turn of the 20th century, the party has governed for barely a quarter of that time. As a result, there has been only one previous instance of a leadership contest occurring while the party’s leader was prime minister. That came in 1976, when Harold Wilson’s sudden resignation triggered a scramble among four MPs, with James Callaghan ultimately emerging victorious.

Starmer’s predicament is not solely procedural but reputational. His net favourability rating has sunk to levels comparable to Boris Johnson’s on the day he resigned, and as low as Jeremy Corbyn’s at his nadir. In practical terms, this suggests a leader who has not only lost momentum but credibility.

Waiting for the results of elections in Scotland, Wales, and local councils to confirm what is already apparent risks far more than the simple loss of representatives for Labour. The party’s internal in-fighting now threatens to deliver the outcome it fears most: effectively handing the next general election to Nigel Farage. The ongoing divisions are eroding the very fabric of Labour, while Reform UK gains strength, scale, and momentum.

Reform has already received the largest single donation from a living donor in British political history. Any success in May — even modest — will translate into more “ground troops” in the form of elected councillors and local representatives, further professionalising the party. Nigel Farage clearly recognises the stakes, hence his exhortation to spend all the money they have as “it’s double or quits… we are just going to go for it… It is the single most important event between now and the general election“.

2. The Politics of Momentum and Market Sensitivities

Political stability is a core determinant of investor confidence, currency valuations, and gilt yields. In the immediate aftermath of the Autumn 2025 budget, markets displayed signs of discomfort when u‑turns and mixed signals from Downing Street appeared to unsettle fiscal expectations.

However, despite these missteps, markets have been remarkably forgiving, buoyed by recent Bank of England rate cuts and a sense that broader global risk appetite outweighs UK domestic political fragility. This forgiveness should not be taken for granted. Continued political drift, especially if the new leadership is unclear on fiscal intent, could lead to widening spreads on UK sovereign debt, a weaker sterling, and reduced foreign investment at precisely the moment Britain needs to demonstrate economic credibility.

For markets, the arrival of a new prime minister and chancellor early in 2026 is a key event risk. Firms and institutional investors will watch closely not just the identities of those office holders, but their fiscal philosophy. A cautious, pro‑market pairing could re‑establish confidence; a more left‑tilting combination could unsettle fixed‑income and equity markets. This is why inside Westminster, speculation over names such as Wes Streeting, Angela Rayner and Lucy Powell is underpinned by even more intense focus on who will sit at the Treasury Dispatch Box.

3. Who’s Next? Leadership Contenders and Market Implications

The leadership race would likely feature two familiar figures and one less well-known alternative:

• Wes Streeting, the Health Secretary, seen as a modernising centre‑left candidate with appeal to business‑oriented voters.
• Angela Rayner, a figure with strong grassroots and union support appeals to Labour’s entire left wing, from hard to soft.
• Lucy Powell, a long term party loyalist and wildcard who, by virtue of her deputy leadership position, may play kingmaker or even emerge as a compromise candidate.

Ed Miliband’s economic experience, particularly in energy and climate portfolios, makes him a name that floats in the background. But he knows that he is discredited after the electoral defeat suffered under his leadership in 2015 and another role will be of greater interest to him.

It is the choice of Chancellor that matters for markets. It is widely assumed that Labour would avoid appointing someone perceived as radically left, such as a figure overtly aligned with big spending or radical redistribution, because bond markets are especially sensitive to fiscal uncertainty. Instead, names associated with fiscal prudence and tempered rhetoric, such as Yvette Cooper or Pat McFadden, are increasingly mentioned as stabilising picks who could calm expectations and reassure both markets and international partners.

This is the central political risk for Q1: a leadership transition that simultaneously offers opportunity and anxiety. If the incoming team delivers a message of competent stewardship, it could arrest Labour’s slide in opinion polls and reset investor confidence. But if the process accentuates ideological rifts or leads to ambiguous policy signals, the opposite could occur.

4. Electoral Pressures: The Rise of Reform UK and the Farage Effect

Underlying these internal party questions is a broader electoral reconfiguration. Reform UK, led by Nigel Farage, has been a disruptive force in recent local elections, snatching seats from both major parties and demonstrating that traditional two‑party dominance is no longer guaranteed. Farage’s party has professionalised its infrastructure, attracted significant funding, and positioned itself as the primary alternative to mainstream politics – a dynamic Labour strategists long feared.

The psychological impact of this shift cannot be overstated. For decades, UK politics operated under a duopoly that implicitly disadvantaged insurgent parties. While the Conservatives’ collapse in parts of 2025’s local polls was a major story, Reform’s surge has been even more consequential because it directly threatens Labour’s core constituencies as well as those disillusioned with the Conservatives.

Farage is already a PM-in-waiting. His tweets in response to the US arrest of Venezuelan President Maduro were viewed by almost 7 times more than that by the official leader of the opposition, Kemi Badenoch. The EU is reportedly demanding what EU diplomats are calling a “Farage clause” be written into closer alignment on agricultural trade, in case a future government unpicks the agreement.

This backdrop explains why some within Labour argue that the risk of a Farage‑led government is not hypothetical but imminent. There is genuine fear that if Labour clings to an unpopular leader or fails to articulate a coherent vision for governing, Reform’s momentum could translate into a seismic upset at the next general election. It is this prospect that will provide the ultimate kick required to deliver a change of prime minister.

5. Policy Drift and Governance Challenges

Starmer’s government has struggled to maintain a coherent message across a wide range of policy areas, and this has exacerbated perceptions of indecision. From welfare reform rebellions to partial reversals on tax measures and complex debates over jury trial reforms, the administration has often appeared reactive rather than strategic.

In some cases, backbench dissent has grown to the point of public embarrassment, with dozens of Labour MPs willing to oppose or abstain on key votes. This level of internal fractiousness should be rare for a government with a substantial parliamentary majority. Instead it is becoming commonplace that as soon as a rowdy backbencher goes public with their outrage, a backtrack by Starmer and Reeves promptly follows. It’s almost unheard of for the government to issue any fresh directions ahead of the Christmas break but on the day before Christmas Eve, the country was suddenly informed of a partial reversal of the so-called family farms tax, by increasing the threshold for inheritance tax relief. The National Farmers Union President welcomed the u-turn, pointing out ‘We have had hours of calls with Labour backbenchers, particularly those representing rural seats, resulting in a rebellion with nearly 40 abstentions on the vote on Budget Resolution 50”. One Labour MP, Markus Campbell-Savours, had the whip removed for voting against it. He represents one of the most rural seats in the country and his father is a Labour member of the House of Lords, having been a Labour MP for twenty-two years in a neighbouring constituency. This hardly makes Campbell-Savours a known troublemaker.

Losing such an MP ahead of the passage of the rest of the Finance Bill does not bode well.

This is not merely a tactical problem but represents a deeper issue of party unity and discipline at a time when government credibility is under scrutiny. For markets and business leaders, policy clarity and predictability are essential. Uncertainty, particularly when it emanates from internal party dynamics rather than opposition ambushes, creates risk premia that can depress investment and stall hiring decisions.

6. The Political Calendar and Forward Expectations

Looking ahead to Q1 2026, several dates and events merit close watching:

• Starmer trip to China – the Prime Minister is due to make his first bilateral visit to China at the end of January
• Finance Bill legislation – proceedings in the Public Bill Committee must conclude by 26 February 2026
• The Spring Forecast – now a forecast rather than a statement, the OBR will not judge whether the Chancellor is meeting her fiscal rules but instead simply provide an update on the economy on 3 March 2026

Through all of this, keep an eye on the polls, particularly those with data on the upcoming May elections to the devolved assemblies in Wales and Scotland. Both have been Labour heartlands and losing support to nationalists in both regions would be deeply unsettling for the Labour Party to stomach.

7. Conclusion: Stability Through Change or Prolonged Drift?

The first quarter of 2026 will test the resilience of Britain’s political institutions and the adaptability of its economic framework. The near‑inevitable end of the Starmer premiership opens a window of opportunity for Labour to reset, unify, and articulate a clear economic agenda. But it also presents a moment of heightened uncertainty that markets and business leaders cannot afford to ignore. Ambiguity and division risk exacerbating a lean growth environment and elevating risk premiums on UK assets.

For investors and corporate boards, the key signals will come not just from political pronouncements but from the credibility and coherence of economic policy that emerges alongside any leadership transition. A team that emphasizes fiscal responsibility, clarity of purpose, and strategic direction could stabilise both markets and public sentiment. Despite winning a huge majority, the government has been dogged by a lack of mandate. “Change” from the Conservative Party does not necessarily translate into removing benefits from pensioners and the disabled, taxing jobs and harming family farms. If anything, it looks to many voters like more of the same. A new Labour leader, by contrast, could present a coherent policy platform that not only shores up the party’s support but also prevents it from facing existential decline on the national stage.

Ultimately, the political and economic fate of Britain in 2026 will hinge on whether the post‑Starmer Labour Party manages to transform internal turmoil into constructive renewal – or instead spirals into disunity at precisely the moment when firm leadership is most needed.

—Helen Thomas