Are markets too sanguine about the risks that the impending General Election poses?

The UK goes to the polls on 7 May (Source: Getty)

Nick Peters, co-portfolio manager of Fidelity Multi Asset Income fund, says Yes.

Over the last six months, the FTSE 100 has risen just over 10 per cent, lagging behind US and European markets. But this hasn’t been a result of markets worrying about May’s election: it’s driven more by the heavy bias of the FTSE 100 to energy and basic materials.

The FTSE 250 may be a better temperature-taker here, since this mid-cap index contains companies that are more domestically focused. In the last six months, it is up well over 20 per cent, suggesting that investors are ignoring the outcome of the election.

The only conclusion I can draw is that investors believe that no-one is going to win outright in May, and so politicians will be unable to pass any meaningful legislation for the time being, which would suit businesses just fine. Despite this, we are still likely to see further volatility in the run up to polling day. If we do see a clear result then, based on what we’re hearing from the major parties, I would expect profit taking, especially in the FTSE 250.

Simon French, senior UK economist at Panmure Gordon, says No.

UK capital markets are taking the General Election in their stride – and so they should. Current macroeconomic data in the UK is as strong as anywhere in the G7. While the FX futures market is signalling a weaker sterling in the run up to the election, even this will have a positive impact for equities, with three-quarters of FTSE 100 company earnings coming from outside the UK.

Further, it is factors outside the direct control of the UK government that dominate the earnings outlook. Be it the global oil price, US interest rates, Chinese real estate or Eurozone QE, the inconvenient truth for politicians is that these are factors they possess little ability to influence.

Finally, much recent focus has been on the prospect of a deal between Labour and the SNP. This would be an unstable alliance and its legacy would damage Labour in England and Wales for a generation. Market participants have so far calculated (rightly, in my opinion) that Labour’s leadership are in no mood for self-flagellation.

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