Columnist

Party politics and the impact on markets

As the political campaigns are in full force, party policies are coming to the fore with promises made and wrangling has begun. Some believe that the General Election is hard for the Conservatives to lose. They are entering the campaign with some of the strongest economic indicators that have been seen for a long time. Inflation, as measured by CPI, hit 0% for the first time since records began, whilst at the same time real wages are rising. Interest rates remain at 0.5% and look set to remain so through 2015, with 2016 predicted by some to be when rates will rise, unemployment is below 6% and falling, while economic growth remains strong. All of these should give the electorate confidence in the party’s ability to see the country through the next parliamentary term.

As the campaigns are underway, the Conservatives and Labour between them are struggling to win much over 70% of the vote. Labour are being troubled by the SNP in Scotland, while for the first time there could be a much more divided right wing, with the real potential for UKIP to take Conservative seats.

Markets have been enjoying a buoyant ride with the FTSE 100 passing through the 7,000 mark for the first time. However, markets don’t like uncertainty. If the polls become more divided in the run up to May 8th, with the campaigns swaying opinion, there may be volatility in UK investment markets. Overseas investors are likely to be more conscious of purchasing sterling denominated assets due to the potential for currency weakness. This could hinder the UK stock market, but it is important to remember that a significant proportion of earnings generated by UK listed companies come from overseas and therefore the state of the UK economy could be seen as less important.

Market sensitivity has already been seen on Friday when the prospect of a hung parliament and signs of weakness in the key manufacturing sector pushed sterling to hit a five-year low against the dollar in foreign exchange markets.

So, when the results are finally announced, should there be a majority victory, this is likely to be positive for the UK and therefore sterling. Will it be positive for the UK equity market? Perhaps, and especially for those stocks whose market is predominantly domestic, such as members of the FTSE 250 or small cap, but ultimately the direction of the stock market will be driven by corporate earnings and valuation over the longer term.

A strong coalition is also likely to be relatively well received by markets, as the crucial decisions still to be made in parliament with regard to budget spending cuts should be able to be pushed through. A minority government, without this decision making ability, is less likely to be well received, causing increased volatility in markets.

This was posted in Bdaily's Members' News section by Lowes Financial Management .