Who are the markets backing to win the General Election?

Uncertainty about the election results has focused attention on to which party is best for the stock market

As attention focuses on the possibility of a change of Government in May,  Hargreaves Lansdown has published a report about what Government’s lead by different parties have meant for returns from the UK Stockmarket.  The research seems to confirm what is probably the subconscious suspicion of many voters – the market generally performs better under the Conservatives. Since 1970 the annualised return has been 16% under the Tories, 9% under Labour and 9% under a coalition.

Those who follow the market only from a distance may be interested that Labour was in power both for the only two governments that presided over negative total returns (1974 and 2001-2005) and the government which saw their strongest % growth (1974-1979).

Those with shorter investment horizons should read Axa Wealth’s recent study, which shows that the last five elections have seen relative market calm in the three months leading up to the vote, and  more marked movement in the three months after. Labour presided over the only negative performance – a 13% fall in the three months after the 2001 election.

What the market hates is uncertainty, which is inherent in any election and it follows that those sectors perceived to be most risky are most impacted. Smaller companies tend to head this list and they are currently suffering as institutions look to safer havens and greater liquidity in larger caps; is has also impacted the level of AIM IPOs in the three months to March, down 63% against the previous quarter, according to UHY Hacker Young.

We live on an island but the vast majority of the value of UK listed equities lies in companies, whether domiciled here or overseas, that rely on trading across the globe. Irrespective of the party statistics above it is therefore, as Hargreaves Lansdown concludes, overall world economic conditions that determine our stockmarket performance.   So, after a short intake of breath on the morning of May 8th, it will primarily be stuff beyond the UK government’s control – the oil price, interest rates, Eurozone worries, political instability of a more frightening nature beyond our shores, and other unknowns round the corner – that we should watch most carefully. These alone are quite capable of giving grounds for very real and deep investor concern.