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History Shows How Elections Can Affect Stocks

History Shows How Elections Can Affect Stocks

 


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

Jeff Obers | BBC News and Current Affairs | getty images

LONDON The UK's general election is less than six weeks away. Opinion polls suggest the centre-left Labor Party could return to power for the first time in 14 years, and analysts said stock markets would react positively to the result.

A Labor victory would oust Chancellor Rishi Sunak's right-wing Conservatives, who announced a July 4 vote last week. Even if Labor fails to achieve a parliamentary majority, it may look to smaller parties and coalition partners to form a government, unless the Conservatives pull off a surprise performance.

In a Wednesday note analyzing stock trends since 1979, Citi said UK stocks have historically been “relatively down” in the six months following an election (the study said the “volatile financial conditions” resulting from the DotCom collapse and the financial crisis were excluded). .

The MSCI UK index of large-cap and mid-cap stocks rose about 6% in the six months following Labor's victory and fell about 5% after the Conservatives' victory, according to Citi.

The more domestically oriented FTSE 250 has tended to outperform the FTSE 100 since the election, with a stronger performance following Labor's victory, it said.

Defensive and financial stocks tend to perform better after elections, with energy performing well in both, the bank said.

Shadow Prime Minister Rachel Reeves, Labor Leader Keir Starmer and Deputy Leader Angela Rayner attend the Labor Party's election platform announcement event held at the Backstage Center in Purfleet, England, on May 16, 2024.

Leon Neal | Getty Images News | getty images

According to Capital Economics, the UK stock market has faltered five times under the past Labor government.

But John Higgins, the consultancy's chief markets economist, said it was “disingenuous” to blame the problems entirely on the party. He said in a note Thursday that this happened during the Great Depression of the 1930s, the postwar 1940s, the aftermath of the oil market shocks of the early 1970s, the dot-com crash of 2000 and the financial crisis.

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

“Whatever your view on history, I doubt Labor’s return to power will be a big issue for investors,” Higgins added.

financial fight

Labor leaders, particularly shadow Chancellor Rachel Reeves and leader Keir Starmer, have repeatedly emphasized over the past year that they will focus on fiscal discipline and look at reducing the national debt relative to gross domestic product (GDP).

Reeves, a former banker, also worked to attract the attention of business leaders and financial institutions, meeting with executives and attending events such as the World Economic Forum in Davos.

Barclays CEO CS Venkatakrishnan told CNBC in January that political risk in Britain was “far lower than ever” and that economic policy differences between the two parties were “quite minimal.”

Labor figures have made it clear that the campaign will accuse the Conservatives of increasing high public debt and undermining Britain's economic credibility during the so-called “mini-budget crisis” under Sunak's short-lived predecessor, Liz Truss.

In comments last week, Sunak said inflation was “back to normal”, the economy was growing and wages “continue to rise”.

stirling view

John Higgins of Capital Economics said previous Labor governments had coincided with five collapses of the British pound over the past 100 years, but wider factors were at play again.

Three could be due to the “unsustainability of the fixed exchange rate regime” between the 1930s and 1970s, one was due to the financial crisis and the fifth was due to the 1976 debt crisis, he said.

The lack of fiscal differences between the two parties means the outlook for the pound and UK government bonds (gold) will be more closely linked to the interest rate outlook, analysts predict.

“[Foreign exchange] Market reactions are strongest when uncertainty about the election is high. This is not applicable to the current situation and if history is any guide, we should expect a modest rise in the British pound over the coming weeks and little reaction to the election result itself,” said Joe Tuckey, head of FX analysis. Argentex Group said in a note on Friday.

“This was the playbook for New Labour’s victory in 1997, when the pound rose just 2.5% in the weeks before polling day. In many ways, the pound will refocus on inflation and Bank of England interest rate policy. The election “Price movements are more decisive than outcomes.”

CNBC's Ganesh Rao contributed to this article.

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