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Will we see a post Election Day market sell off?

Equity markets seemed to have shrugged off the General Election so far but will that continue? Andrew Herberts, head of private investment at Thomas Miller Investment, takes a view

It has been taken as axiomatic that markets hate uncertainty and will sell off in periods of disruption. However, despite its outcome being far from certain, the general election does not appear to have caused a wide spread sell off. In fact, the FTSE 100 made an all-time high on 15 April and has clung to that level recently, albeit without particular signs of pushing aggressively higher.

When we had a hung parliament in 1974, the markets sold off markedly. In March of that year, Edward Heath’s government was replaced by a minority Labour administration under Harold Wilson which struggled on to October before calling another election (which it won with a three seat majority). Between the February and October elections, the UK’s FTSE All Share Index fell nearly 50%.

Looking back though, circumstances in 1974 were very different to those of today. A miners’ strike had exaggerated the effect of a five-month OPEC oil embargo on the West, resulting in the government of the time introducing a three day week to conserve energy. While the miners’ strike compounded the situation, the UK’s recession was the result of the oil embargo and resulting price spike and the fall in equities reflected similar falls globally.

In 2010, during the period of political uncertainty after the election, the UK All Share equity index actually rose marginally (having fallen a little since the start of the year).

Political expediency over facts

Today, investors have been focussed on the election as one of many factors driving investment decisions with global macro-economic conditions being foremost. It does seem to be prudent, though, to hold off adding to positions in some of the more politically exposed industries. These include utilities (potential price caps), banks (further bank levies), tobacco (plain packaging and levies) and betting. All have the capacity to be seen as political footballs where decisions made centrally are made as much out of political expediency as on sober consideration of facts.

As regards the ultimate election outcome, broadly speaking markets will prefer a centre right to a centre left government. This should surprise no-one however as long as neither interferes fundamentally with the UK’s open economy and global outlook, we can still be constructive on equity markets into the future based on the strength of the world’s economies.

Another issue to note is that while equity markets have largely appeared to shrug off election worries thus far, sterling has been weak in the currency markets. Given the complexities of what drives markets, this may be the result of election concerns, but equally could be the result of differing interest rate expectations between the UK and the US and the introduction of quantitative easing in the Eurozone attracting hitherto Sterling investors to speculate on asset price appreciation driven by the ECB.

Finally, the fact that the majority of MPs sent to Westminster from Scotland believe in the breaking of a Union that we Scots recently voted resoundingly to retain should be an irony lost on no-one. Whether it will have an effect on the confidence of business to invest in Scotland remains to be seen, but at a UK level, it will probably not alter the probability of Labour forming a government. It may, however, profoundly influence the tenor of that administration.

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