Despite uncertainty over how negotiations could unfold, it is unlikely that the next government will enforce major political change. As a result, the stock market seems to have shrugged off any political fears. The economic backdrop in the UK is encouraging and the electoral outcome is unlikely to have a significant bearing on the future profitability of most companies with global earnings over the medium term. For these large multi-national companies, there are more important global economic issues to focus on.
As the situation develops after 7 May 2015, certain sectors of the market will of course react differently to others depending on the electoral outcome.
An EU referendum by 2017 is likely to cause uncertainty for the market as a significant proportion of UK goods are exported to other European countries. In the short term, an EU referendum could adversely affect GDP growth and lead to capital outflows, causing sterling to weaken.
The Conservatives are likely to pursue further tightening of fiscal policy, which could have a negative impact on healthcare and support service companies for example. Their fiscal stance is more likely to prolong low interest rates providing a more supportive outlook for the bond market.
A labour-led government is likely to target sectors such as banks, energy and property with additional taxation and regulation. Labour’s plans would almost certainly impact the earnings and profit margins of these companies.
Labour would run a looser fiscal policy via greater government spending. As a result this would perhaps bring forward expectations of monetary tightening, adversely impacting the bond market outlook.
Finally, a deal with the SNP could result in concerns with regard to the stability of the government and a possible second referendum for Scottish independence. Instability could cause greater volatility in the markets.
Elsewhere, bond yields in Europe and the US have been rising as deflation worries ease and markets anticipate an interest rate rise from the Fed later this year. In addition, the oil price has contributed to a sell-off in global bonds as it has rebounded strongly in recent weeks, reducing deflationary pressures.
In our view, it is unlikely that there is going to be a significant medium term impact on UK equities as a result of the General Election and no government will want to threaten the UK economic recovery. Of course, this is not to exclude short-term market volatility to reflect uncertainty in the event of a hung parliament and prolonged discussions between the parties with regard to possible coalitions or alliances. In addition, such market volatility could lead to a short-term market correction if the result of the election is an unstable minority government with the potential for a second election later in the year.
However, in general, global issues remain the primary focus for investment markets and these are likely to have a greater impact on the performance of UK stocks over the medium to long term. The most significant impact of the General Election is likely to be on sterling which is currently more volatile than it has been for last 5 years, reflecting the capital market’s concerns over the election.
Please note, this article is for information only and does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change; we do not give tax advice. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk