General election stalemate set to rock stocks: Markets face historic uncertainty, UBS warns

 
Tim Wallace
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Markets will take a hit from historic levels of uncertainty
Uncertainty before and after 7 May threatens to make 2015 a turbulent year for markets.

Markets will take a hit from historic levels of uncertainty before and after May’s General Election, analysis by a leading investment bank has warned.

Share indices typically fall by an average of three per cent in the six months after a general election, UBS said – and the extra uncertainty this time around could deal a bigger blow to the market.

“The high likelihood of a weak, minority or coalition government – possibly including multiple partners – will likely mean that the uncertainty shrouding the outlook in the run-up to the poll does not get resolved in its immediate aftermath,” the report says. Current polls suggest that no party will win a clear majority on 7 May, potentially prompting a period of intense political wrangling.

If Labour manages to form some kind of government then banks and energy firms will be foremost among businesses which see their shares come in for a beating, UBS says. Labour leader Ed Miliband has pledged strong interventions in both financial and energy markets.

More broadly, stocks could suffer from higher taxes imposed by a Labour-led administration. However, a Conservative victory could mean years of uncertainty over Britain’s future in the European Union, also knocking equity markets.

The outcome is the most uncertain in decades. Analysts at Deutsche Bank believe the most likely outcome is a Labour-led coalition with the Scottish National Party.

But Goldman Sachs predicts the Conservatives will gain the most seats in May’s election and so will lead the next government.

Meanwhile a Labour victory could shake the bond markets, pushing up the cost of borrowing as the government would pile on extra debts.

“A perceived less-cautious track record with regard to management of the public finances, and the looser planned tightening path that the Institute of Fiscal Studies sees adding as much as £125bn to cumulative borrowing over the next parliament compared to the Conservatives’ plans, may generate a degree of concern that could undermine gilts,” said UBS.

And while domestic investors may breathe a “sigh of relief” at a Conservative majority, concerns over EU membership would kick in soon.

“Overseas investors are likely to materially reduce demand for UK assets if an outcome that results in Brexit looks possible,” the note to clients said. “This anxiety would start to manifest itself soon after the election result in our view.”

As membership of the EU has important consequences for long-term capital flows to and from the UK, UBS says markets could rise or fall unusually sharply depending on the result.

“Any result which could jeopardise structural liquidity preference for sterling would render permanent the current elevation in sterling’s risk premium.”

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