UK Election - Cash or burn?

19 March 2015

UK Election – Cash or burn?

The UK general election 2015 looks set to be one of the most closely watched and hotly contested in years. What with the rise of alternative parties such as UKIP here at home and the success of anti-Europe/Anti-austerity/anti-immigration groups such as Syriza in Greece, Podemos in Spain and Le Front National in France, the political landscape has changed markedly and the May outcome in Westminster is seeing voters take more of an interest than ever. Te UK's economic turnaround is also proving key. Could a change of power be on the cards? What does the UK general election 2015 mean for the UK stocks you hold?

Upside and downside risks

This report discusses how certain stocks and the UK 100 index have tended to trade in the run-up to and following previous elections. Looking back over the last 6 UK elections we note that the UK Index has delivered mixed performance. Some stocks have tended to do well, while others have tended to suffer, suggesting both upside and downside risks for UK equities over the coming months, be there a shift in power or not.

UK Corporate race

UK corporates have been racing to raise money and list new shares (IPO) this year, aiming to get in ahead of any potential election-based risk depending on who is in power come May 8th. Companies have also been trying to get financing in place before the Bank of England (BOE) raises UK interest rates for the first time since July 2007 following a period of post-crisis accomodative monetary policy and historically low borrowing rates. With the US Fed already very close to upping its benchmark lending rate, it is widely expected that the UK will be the next to follow.

UK Index Highs

The UK flagship index has already just recently made fresh all-time highs and many wonder whether a favourable election outcome (a pro-businesss Conservative win?) will see us trade above 7,000 for the first time ever. At the same time, with some despondency towards the incumbent coalition after years of austerity the more socialist Labour party is doing rather well which could take the wind out of the sails of UK equities should the public vote for a change of power.

UK 100 Cash (-)

The graph above highlights the last 6 elections and how the UK’s UK 100 performed in the run-up to and following previous elections. In some cases the gains are impressive, in others losses are not negligible.

The Bookies

At present, the bookies show Labour with a marginal lead over the Tories, however, with only weeks to go one thing is for sure. There will be myriad twists and turns with differing polls showing both parties taking and ceding the lead all the way to the final hour of ballot counting overnight on May 7/8. Televised debates are just about to get started. The fun has only just begun.

Change is good?

With a ruling coalition in place for the last 5 years and, as mentioned, much despondency regarding the austerity weathered, what can’t be ignored is the economic turnaround and improvement in budget deficit following the financial crisis. Could this be enough to see Cameron & Co get another term avoiding a third successive power change.

While 1979-1997 (Conservative) and 1997-2010 (Labour) saw relative stability in terms of political rule, with office being held over consecutive elections and only two shifts in power (1997 and 2010) are we set for yet another change in the middle of the current decade?

Will a change on Downing Street be welcomed or will markets take fright? We note that the last time we saw a change of power in 2010 (Cons/Lib-dem coalition from Labour) the UK Index gave up 6% in the 2-month run-up, before gaining 5.2% in the same period thereafter.

In 1997, when Labour took the reins from the Conservatives the UK index gained 3% in the 2-months prior and added 7% afterwards. Could it be that change is good?

Hung parliament?

With it highly probable that neither the Blue’s or Reds win on an outright majority , it is thus however, highly likely that we again see need for discussions to form another coalition between a major and minor party.

While a hung parliament could be seen a bad news, it is more often than not market positive, especially if markets are doing well. How? Uncertainty in the interim can just see the current party continueuninterrupted, and once a coalition is formed, reforms are typically more difficult to push through. The maintenance of the status quo is thus a bonus. Bullish news for UK equities.

Trend? Friend?

Everyone knows that past performance is no guarantee of future returns, however, with the Automobiles & Parts sectors having rallied 13-19% in the 2 months after the last 3 elections could this offer a tradeable opportunity?

What about Telecoms, Insurance and Technology adding 7-16%. It may not be fair to look at basic resources/mining trends (+10-17%) given the unique situation we find ourselves in with a strong USD before a US rate rise and uncertainty as to global growth demand.

What about the 2001 election coinciding with the burst of the dot.com bubble, and the 2010 election with the recovery from financial crisis lows?

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19 March 2015