7th May 2015
General Election day is here at last with the final polls still pointing to a hung parliament, leaving open the prospect of another coalition or a minority government propped up formally or on a vote-by-vote basis by smaller parties writes Jason Hollands, managing director at Tilney Bestinvest…
The campaign has seen some shrill warnings by leading business figures about the potential impact of the election on the UK economy both in response to specific policy agendas – including wealth taxes from parties on the Left and an EU in/out referendum from those on the Right – but also arising from fears about the potential instability of a Government that might be patched together with the support of minor parties.
Policies on tax, spending and borrowing / debt reduction do indeed have a real impact on the domestic economy, potentially affecting how confident the public and small businesses feel about the future and that drives economic activity, such as consumer spending and savings. Perceptions of how Government finances will be managed will feed through directly to international investor appetite for gilt-edged securities and Sterling, so market reaction to the results is most likely to be seen in the value of the Pound against other leading currencies.
But when it comes to the UK stock market, it is important to recognise that, on the whole, it really isn’t a representative picture of the UK economy at all. The London Stock Exchange is a global exchange, dominated by truly international businesses with over 70% of the earnings of the FTSE 100 generated outside of the UK.
That is not to say that there aren’t particular companies and sectors of the UK market that are more sensitive to policy changes. For example, Labour is committed to intervene in household energy prices (impacting the likes of Centrica and SEE), increasing the Bank levy and adding further tax on tobacco sales in the UK. Both the Conservatives and Labour have made major announcements relating to the property market, which could impact house builders. Yet markets will likely have substantially priced in some of these factors.
So while a short-term equity-market response to the election result on Friday is quite possible, especially in the event of a surprise not foreseen by the polls, we caution against investors participating in any short term knee jerk reaction to whatever results emerges. Experience suggests that markets have a tendency to over-react to “events” and panic selling with the crowd rarely makes sense.
In our view the bigger medium drivers of markets will be future moves by central banks, as risk assets across the globe have been heavily driven by the provision of liquidity in recent years, resulting in the misallocation of capital. We therefore continue to favour equity markets such as Europe and Japan where stimulus measures remain in place.