General Election 2015: Which political party is best for the UK stock market?

Billy Ehrenberg
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Global conditions, not governance, are the biggest influence on stock market performance?

The UK stock market has performed almost twice as well under Conservative rule than under Labour stewardship, according to research by financial adviser Hargreaves Lansdown.

The analysis of the stock market’s behaviour since 1970 revealed other facts too: the last Labour minority government of 1974 (a year in which there were two general elections) oversaw a 50 per cent fall in the stock market, while the market increased over 360 per cent in the five following years. The Thatcher/Major years were fertile too: the market grew over 200 per cent during the period.

Using Bloomberg data on dividends reinvested, the report revealed the annualised return since 1970 was 16 per cent during years the Tories were in sole command, and nine percent when Labour was at the helm. The coalition government was also at nine per cent. The report doesn’t, however, point the finger at political leadership, instead blaming global economic conditions.

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Laith Khalaf, senior analyst at Hargreaves Lansdown, said global conditions, not governance, were the driving force behind the trends.

Since 1970, the Conservatives have a better stock market score card than Labour, but if you look at what has driven markets, this isn’t really a reflection of the political leadership in this country. The UK stock market is made up of companies with global earnings streams, and the fortunes of these companies are not dictated by any one political party.

Indeed, the decision by Opec to maintain oil production in the face of slowing demand will almost certainly have a greater impact on the earnings of Footsie companies this year than the outcome of the UK election.

Central bankers also take centre stage in today’s low interest rate environment, and none more so than the US Federal Reserve. Their decision to raise interest rates, currently pencilled in for this summer, will be a symbolically significant moment for stock markets across the globe.

Is 2015 the new 1974?

Perhaps the most interesting element is the parallel between 1974 and 2015. In 1974 Labour won the first general election without achieving an overall majority. No coalition was formed and a second election was held in October. During the period of minority rule the market fell 47 per cent, but then rocketed 368 per cent during the five years of Labour rule that followed.

The period of loss was brought on by a global recession, and there were problems with oil prices and inflation. Although this sounds familiar, it’s worth noting the marked differences in the issues: UK inflation was soaring at 20 per cent rather than flirting with deflation, and oil prices had quadrupled, rather than plummeted.

Thatcher and Major (1979 – 1997)

Likewise, the boom during the Thatcher/Major years (1979 – 1997) was primarily driven by global influences. Although a £1,000 investment in 1979 would, on average, have yielded £20,000 by 1997, there were peaks and troughs along the way, with roughly the same conditions prevailing across the globe.

The high level of return is impressive, but the stats come with a caveat: an investment in US stocks during the same period would have returned roughly the same profit.

Blair and Brown (1997 – 2010)

A rollercoaster ride for stocks was again influenced by the big, global issues. Up until 2000 the dotcom bubble lifted stocks to high points, and when it burst it dragged stocks to new lows. Following that, company profits dragged the markets up, ready for the global crisis to dash them against the rocks. None of these influences was a local phenomenon.

Coalition and beyond

Many influences have been at play during the years of collaboration, not least the aftershocks from the financial crisis and the ailing global economy. The big worry may well be monetary policy, as the report says:

Many would point to the vast monetary stimulus packages launched by central banks as the driving force behind this expansion in optimism. Those same voices would also question, with some justification, what happens when the music stops.

So what can the next government expect? Luckily, history tells us, a minority government was not likely the cause of the market’s poor performance in 1974.

Instead, conditions will be dictated by the global stage: geopolitical concerns, oil prices, the Eurozone and the performances of the US and China.

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