UK Election- What It Means for the Stock Market

5th January 2015

The starting gun on the UK election has sounded, as MP's return to Parliament today. David Cameron has come out of the starting blocks by flagging the prospect of an early referendum on EU membership, while Ed Miliband kicks off his campaign in a speech in Manchester later today.

As the electioneering ramps up, investors will no doubt be wondering what the forthcoming election will mean for the UK stock market. Below we look back at the performance of the UK market in previous six election years (see definition below), and take a look at the events which shaped those market movements.

Laith Khalaf, Senior Analyst, Hargreaves Lansdown:'The UK election is clearly a significant event in the calendar this year, and we can expect wobbles as the market broods over what the polls mean for UK membership of the EU, public spending and the budget deficit.

However history suggests it is often global events which tend to move the UK stock market, and with around two thirds of FTSE 100 revenues now coming from overseas, it is easy to see why. In the global arena this year the monetary policy of the US Federal Reserve and the ECB are likely to feature heavily, along with the usual catalogue of unforeseen events that take everyone by surprise.

Investors shouldn't therefore expend too much energy on second guessing which way the election is going to go, and what effect this will have on UK stocks. Instead it is better to focus on the long term when it comes to investing. Chances are, when we look back on market performance in 2015, it won't be the election we are talking about.'

UK elections 1987- present

If we think of the election year as starting six months before the vote, and ending six months after, the UK market has risen in five of the last six such periods, though there have been ups and down along the way.

11th June 1987. Margaret Thatcher won her third term in office in June 1987 with a comfortable majority. Over the election year (6 months before, and 6 months after the vote) the market returned 5.4%. However there was a 30% market fall during this period. This huge market movement had nothing to do with the election though; it was the 1987 stock market crash, which began in the US and spread across global markets.

9th April 1992. The April 1992 election was won by John Major, and the UK was just emerging from recession. The major market story of the year was Britain's exit from the European Exchange Rate Mechanism, as the pound came under sustained pressure. Clearly Major's newly elected Conservative government made this decision, but they were left no choice by movements in the currency market. Despite the turbulence the UK stock market returned 1.2% over the election year.

1st May 1997. This was the beginning of Tony Blair's reign as Prime Minister. It was also a fantastic time for the UK stock market, which returned 21.8% over the election year. Before you conclude this was down to some sort of 'Blair effect', consider the fact US and European markets returned even more, as stock prices enjoyed considerable gains across the developed Western world.

7th June 2001. Tony Blair won again in the June 2001 ballot. This was the one election year out of the last six when the UK market fell, returning -12.3%. Again, this had little to do with UK politics. The market was already reeling from the effects of the tech bubble crash when the terrible events of 9/11 sent stocks spiralling down even further.

5th May 2005. The next election was in May 2005, and Tony Blair won again. The FTSE All Share had another strong period, returning 19.4% over the election year. This time the rally was driven by stock prices reacting to a rapid expansion in company profits.

6th May 2010. That brings us up to the last election in May 2010 and the current Coalition government. The election year was again very positive, returning 19.0%, though it was an extremely volatile year. The twists and turns were largely due to global events however, in particular the eurozone crisis, the BP oil spill, and finally QE2 in the US.

SOURCE
Hargreaves Lansdown
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