Speaking at a recent briefing on what the election means for UK equities, UBS experts said that while a Labour government could hurt areas such as housing, utilities, banks and tobacco, a Conservative victory would bring more broad-based uncertainty through an EU referendum.
The bank referred to analysis of stockmarket performance after elections since 1970, finding that UK equities struggled to outperform global markets half of the time one and three months before the election and 75 per cent of the time after the elections. Conservative wins led to the UK market outperforming global markets 83 per cent of the time before elections and 50 and 30 per cent of the time one and three months afterwards.
The bank says that while that could lead one to suggest that a Labour win is a less market friendly outcome than a Conservative one, but argues that since a Conservative win this time carries the threat of an EU referendum and the uncertainties this would entail, it would be wring to make such a generalisation.
But it does conclude that an inconclusive result will lead to a weaker pound, which would generally benefit the FTSE100 since over 70 per cent of its sales are generated outside the UK.
F&C argues the chances of a referendum on Europe or a continuation of tight fiscal policy are both unlikely. It argues that gilt and equity markets may suffer more than sterling as a result of political uncertainty.
UBS Wealth Management head of investment office, UK Bill O’Neill said: “Will there be an immediate relief rally if the status quo is maintained? Very possibly. But it would soon be overtaken by other events. We haven’t seen a sharp difference in the market’s attitude to the two main parties.”
F&C chief economist Stephen Bell says: “Many City analysts have highlighted political uncertainty as a reason to be bearish on sterling, with the UK’s large current account deficit another factor. However, the prospect of a rate rise might mean that sterling appreciates though, a wider budget deficit would also imply a wider current account deficit. Higher base rates, more government borrowing and political turmoil would also weigh on the gilt market.
“Combine this with less business-friendly policies and the outlook for UK equities does not look rosy. There would undoubtedly be a significant impact on certain sectors, such as banks and utilities but we would caution about getting too bearish of the overall market. Many companies in the FTSE are global and even for those that are more domestically-orientated, share prices are heavily influenced by global risk appetite.
“Finally, we would mention the potential impact on one specific policy with limited market implications but which could have a profound impact on Britain’s international relations: Trident. As with fiscal austerity, both major parties are committed to retaining it, yet most coalitions would be opposed. “Before we get too carried away with negativity, we should note the limits of government power, for good or ill. Interest rates are set by the independent Bank of England MPC. Fiscal policy is a political decision but the Office for Budget Responsibility and the Institute for Fiscal Studies are important constraints on creative arithmetic and wishful thinking. However, the next parliament is unlikely to be a source of stability and support to the markets. Just how much instability we get is as uncertain as the outcome of the election itself.”
