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Story shows how a UK election can impact the country's stock market – NBC 7 San Diego

Story shows how a UK election can impact the country's stock market – NBC 7 San Diego

 


  • The UK is heading towards a general election on July 4, and history could point to a neutral or positive stock market reaction if Labor ousts the Conservatives, analysts say.
  • Since 1979, the MSCI UK index of large and mid-cap stocks has risen around 6% six months after Labor victories and fallen around 5% after Conservative Party victories, according to Citi research.
  • Given the limited differences in fiscal management expected from the two sides, the British pound and bonds are likely to be more influenced by the interest rate outlook.
Labor leader Tony Blair arrives at Downing Street after his election victory with flag-waving crowds in the background, May 2, 1997.

Jeff Overs | BBC news and current affairs | Getty Images

Labor leader Tony Blair arrives at Downing Street after his election victory with flag-waving crowds in the background, May 2, 1997.

LONDON The United Kingdom is less than six weeks away from a general election in which polls suggest The center-left Labor Party could return to power after 14 years and analysts believe stock markets would react positively to this outcome.

A Labor victory would oust the right-wing Conservative Party led by Prime Minister Rishi Sunak, who announced the July 4 vote last week. Even if Labor fails to secure a parliamentary majority, it could seek a coalition partner with a smaller party to form a government, unless the Conservatives achieve a surprise outperformance.

In a Wednesday note analyzing stock market movements from 1979 onwards, Citi said UK stocks were historically “relatively flat or even down” in the six months following the election (research excludes “volatile financial conditions » of the DotCom crash and the Great Financial Crisis). .

The MSCI UK index of large and mid-cap stocks rose about 6% six months after Labor victories and fell about 5% after Conservative victories, according to Citi.

The more domestically focused FTSE 250 has tended to outperform the FTSE100 after the election, with stronger outperformance following Labor victories, it says.

Defensive stocks and financials tend to perform better after elections, with energy performing well on both sides, the bank also found.

Shadow Chancellor Rachel Reeves, Labor Leader Sir Keir Starmer and Deputy Leader Angela Rayner attend an event to launch Labor's election promises at the Backstage Center on May 16, 2024 in Purfleet, United Kingdom.

Leon Neal | Getty Images News | Getty Images

Shadow Chancellor Rachel Reeves, Labor Leader Sir Keir Starmer and Deputy Leader Angela Rayner attend an event to launch Labor's election promises at the Backstage Center on May 16, 2024 in Purfleet, United Kingdom.

According to Capital Economics, the UK stock market has fluctuated five times under previous Labor governments.

However, the firm's chief markets economist John Higgins said it would be “misleading” to attribute them entirely to the party. They occurred during the Great Depression of the 1930s, in the postwar 1940s, following the oil market shock of the early 1970s, the DotCom crash of 2000, and during the Great Financial Crisis, a- he declared Thursday in a note.

Higgins also observed that the relative performance of UK stocks has been “generally disappointing since 2010”, when the Conservatives took power.

“Whatever your view of history, we doubt Labor returning to power will be a big deal for investors this time around,” Higgins added.

Tax fight

Labor leaders, particularly shadow finance minister Rachel Reeves and party leader Keir Starmer, have repeatedly stressed over the last year that they will focus on fiscal discipline and seek to reduce the national debt by percentage of gross domestic product.

Reeves, a former banker, also sought to court business leaders and the financial establishment, meeting with executives and attend events such as the World Economic Forum in Davos.

BarclaysCEO CS Venkatakrishnan told CNBC in January that political risk in the UK was “much lower than it's ever been” and that the difference in economic policy between the parties was “pretty minimal”.

Labor officials have made it clear that in the current campaign they will accuse the Conservatives of running an election campaign high public debt and undermine the UK's economic credibility during the so-called “mini-budget crisis” under Sunak's short-lived predecessor Liz Truss.

In the comments last week, Sunak said inflation had “returned to normal,” the economy was growing, and wages were “rising sustainably.”

Sterling Outlook

John Higgins, of Capital Economics, said previous Labor governments coincided with five crashes during the 2000s. Pound sterling over the past 100 years, but that broader factors were again at play.

Three could be attributed to the “unsustainability of fixed exchange rate regimes” between the 1930s and 1970s, one to the Great Financial Crisis, and the fifth to the global financial crisis. Debt crisis of 1976he said.

The lack of fiscal divergence between the parties means the outlook for sterling and British government bonds, known as gilts, will remain more tied to the outlook for interest rates, analysts predict.

[Foreign exchange] Market reactions are strongest when there is a high degree of uncertainty surrounding an election. This cannot apply to the current situation, and if history is any guide, we should expect modest gains in the pound over the coming weeks, and almost no reaction to the election result itself,” Joe Tuckey, head of foreign exchange analysis at Argentex Group, said in a Friday note.

“This was the scenario that led to New Labor's victory in 1997, where the pound sterling rose by just 2.5% in the few weeks before polling day. In many ways, the pound sterling will refocus on inflation and the Bank of England's rate policy, which is likely to be more decisive for price movements than the election outcome.

CNBC's Ganesh Rao contributed to this article

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