History shows how a UK election can impact the country’s stock market

  • The United Kingdom is heading into a July 4 general election and history may indicate a neutral to positive stock market reaction if Labor ousts the Conservatives, analysts said.
  • Since 1979, the MSCI UK index of large and mid-cap shares has risen around 6% six months after Labor victories and fallen around 5% after Conservative Party victories, according to Citi research.
  • Given the limited differences in expected fiscal management by both sides, sterling and bonds are expected to be more influenced by the interest rate outlook.

Jeff Overs | BBC news and current affairs | fake images

Labor leader Tony Blair arrives at Downing Street after his election victory with flag-waving crowds in the background, May 2, 1997.

LONDON — There are less than six weeks until the United Kingdom general election. surveys suggest The center-left Labor Party could return to power after 14 years, and analysts say stock markets would react positively to that outcome.

A Labor victory would topple the right-wing Conservative Party led by Prime Minister Rishi Sunak, who announced the July 4 vote last week. Even if Labor fails to win a parliamentary majority, it could seek a coalition partner with a smaller party to form a government, unless the Conservatives deliver a surprise outperformance.

In a note on Wednesday analyzing stock movements from 1979 onwards, Citi said UK shares have historically been "relatively stable or down" in the six months after the election (the research excludes "volatile financial conditions " of the DotCom collapse and the Great Financial Crisis). .

The MSCI UK index of large and mid-cap shares has risen around 6% six months after Labor victories and is down around 5% after Conservative victories, according to Citi.

The FTSE 250, more oriented to the domestic market, has tended to outperform the FTSE 100 after the election, with stronger outperformance following Labor victories, he said.

The bank also found that defensive stocks and financials tend to do better after the election, with energy performing well on both sides.

Shadow Chancellor Rachel Reeves, Labor Leader Sir Keir Starmer and Deputy Leader Angela Rayner attend an event to launch Labour's election promises at the Backstage Center on May 16, 2024 in Purfleet, UK.

Leon Neal | Getty Images News | fake images

Shadow Chancellor Rachel Reeves, Labor Leader Sir Keir Starmer and Deputy Leader Angela Rayner attend an event to launch Labour's election promises at the Backstage Center on May 16, 2024 in Purfleet, UK.

According to Capital Economics, the UK stock market has faltered on five occasions under previous Labor governments.

However, the consultancy's chief markets economist, John Higgins, said it would be "disingenuous" to attribute them entirely to the party. They occurred during the Great Depression of the 1930s, in the postwar 1940s, after the oil market crisis in the early 1970s, the DotCom collapse in 2000 and during the Great Financial Crisis, he said in a note on Thursday.

Higgins also noted that the relative performance of UK stocks "has generally been disappointing since 2010", when the Conservatives took power.

"Whatever your view of the story, we doubt Labor's return to power will be a big deal for investors this time," Higgins added.

Tax fight

Labor leaders, particularly shadow finance minister Rachel Reeves and party leader Keir Starmer, have repeatedly stressed over the past year that they will focus on fiscal discipline and seek to reduce the national debt as a proportion of output. gross internal.

Reeves, a former banker, has also tried to court business leaders and the financial establishment, meeting with executives and attending events such as the World Economic Forum in Davos.

Barclays Chief executive CS Venkatakrishnan told CNBC in January that political risk in the UK was "much lower than ever" and that the difference in economic policies between the parties was "pretty minimal".

The Labor leaders have made it clear that in the current campaign they will accuse the Conservatives of accumulating a high public debt and to dent the economic credibility of the United Kingdom during the so-called "mini-budget crisis" under Sunak's predecessor Liz Truss, who was briefly in office.

In last week's comments, sunak said inflation had "returned to normal", the economy was growing and wages were "increasing sustainably".

Sterling Outlook

John Higgins of Capital Economics said previous Labor governments coincided with five crises in the british pound in the last 100 years, but that again broader factors were at play.

Three could be attributed to the "unsustainability of fixed exchange rate regimes" between the 1930s and 1970s, one to the Great Financial Crisis and the fifth to the Debt crisis of 1976he said.

The lack of fiscal divergence between the parties means the outlook for both sterling and UK government bonds, known as gilts, will remain more connected to the outlook for interest rates, analysts predict.

"[Foreign exchange] Market reactions are stronger when there is a high degree of uncertainty surrounding an election. "This cannot be applied to the current situation, and if history is any guide, we should expect modest gains from sterling in the coming weeks and almost no reaction to the election result itself," Joe Tuckey, head of analysis currency. at Grupo Argentex, he said in a note on Friday.

"This was the strategy in the run-up to New Labour's victory in 1997, where sterling rose just 2.5% in the few weeks before election day. In many ways, sterling will return to focus on inflation and the Bank of England's rate policy, which is likely to be "more decisive for price movements than the election result."

— CNBC's Ganesh Rao contributed to this article.

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