The upcoming General Election result is currently hard to call. Will voters flock to UKIP, and can the Liberal Democrats resurrect their historic share of the vote? It seems likely that one or both of these parties could be a junior partner in the next government. Or perhaps the Scottish Nationalists will be the kingmakers? Unless one of the two main parties pulls ahead decisively, the election is likely to be followed by some serious horse-trading as Mr Miliband or Mr Cameron attempt to assemble a workable coalition.
The stock market hates uncertainty, so the run-up and immediate aftermath could be volatile. UK politics rarely sets the market's whole course, but it can be crucial for individual industries if they are in the politicians' crosshairs.
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Which policies could have the most impact, if their advocates end up in government?
In the energy sector, the Labour Party's pledge to intervene over gas and electricity prices is an obvious policy that matters to investors. No price rises until 2017 is the policy, and although Labour have not yet won the election, the policy may already be distorting the behaviour of power firms. Wholesale oil and gas prices have tumbled, but utilities are resisting making significant price cuts. That could be because power firms know that a large cut today, if followed by a Labour win, could leave them unable to offset any rising costs of energy, if wholesale prices were to rise after the election.
SSE and Centrica are being hit for fear that politicians will look to beat them with sticks if they do not cut now, and fear that even if they do, they will then be at risk of being caught out if wholesale energy prices recover. These stocks could enjoy a bounce if Mr Miliband does not make it through the front door of No. 10.
Unsurprisingly, the Labour Party is not banker-friendly. Whilst investors should expect a more bellicose approach to financial regulation in general, should Labour form the next government, there is a specific policy to increase the hours of free childcare for three and four year olds, paid for by an increased Bank Levy. That could see an £800m a year bill landing on the banks' doormats.
House builders could be both winners and losers from the election. Labour has promised to increase the numbers of homes built a year, by around a third. But these will be mainly social housing, profit margins on which tend to be low. On the downside, any increase in taxation could hit the housing market, especially the top end, where Labour's tax policies will likely bite hardest. In truth though, the bigger impact on the housing market is likely to come from rising interest rates, whenever they finally arrive. The top end of the housing market has had a clobbering as it is, with new double-digit Stamp Duty rates on properties which are worth more than £925,000.
Outsourcing public services to the private sector is big business. The lesson of the last election was that a change of colour causes inertia in the civil service, as bureaucrats struggle to understand what their new masters require. That could be a headwind for Serco's turnaround efforts. Capita looks better set; they've got minimal rebids and contract expiries for the next five years, and can just concentrate their efforts on private sector work if the public sector goes cold for a while. Usefully, Capita is currently trading below its longer-term average valuation, on a forward consensus price-to-earnings ratio of 15.4x versus an average of almost 18x.
A Tory victory, or Tory-led coalition, is probably the market's first choice, certainly for financial service sectors and utilities. But investors did not do too badly under Labour, personal taxation aside. In the first three years of Tony Blair's government, the FTSE 100 index rallied over 50%, with dividends reinvested. By the time Gordon Brown conceded defeat, the total return on the FTSE 100 over the Labour years, including the reinvestment of dividends, was equivalent to 4.25% p.a., despite the dotcom bubble bursting and the financial crisis exploding along the way. This shows the power of long-term earnings growth and the importance of income, without which investors would have made less than 1% p.a. Under the current coalition, investors have been rewarded with a total return of 9.0% p.a. on the FTSE 100 Index despite regional wars, deadly diseases and the commodity super-cycle that turned out to just be another cycle along the way.
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