Which Party Wins the Stock Market Vote?

9th April 2015

With one month to the election, historical analysis suggests the UK election result probably won't be the key factor in determining stock market performance in the next 5 years.

Stock market has performed almost twice as well under Conservative rule.
This has largely been a result of global market events rather than political leadership
Last Labour minority in 1974 witnessed a near 50% fall in the stock market
However conditions for any incoming government in 2015 are much more favourable
Current coalition has delivered 9% annualised growth, but this is almost all sentiment and no earnings
Laith Khalaf, Senior Analyst, Hargreaves Lansdown:

'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.'

Stock market performance since 1970

Then UK stock market has performed twice as well under a Conservative government as it has under Labour, according to performance statistics dating back to 1970. Over the last 45 years there have been five Conservative governments, five Labour governments, and the current coalition.

Under Conservative rule the stock market has returned on average 16% a year, compared to 9% under Labour.

Markets can be capricious beasts in the short term, but on average this trend reflects the growth in UK company profits under the two parties; earnings grew by on average 11% a year under the Conservatives, compared with 6% a year under Labour.

However the raw numbers conceal some dramatic detail which suggests our political leaders play a relatively minor role in stock market performance.

1974: A blueprint for 2015?

The Labour minority government which held power from February to October 1974 presided over a near 50% fall in the UK stock market, but this could hardly be laid at the incoming government's door.

In 1974, the world was mired in a global recession, UK inflation was closing in on 20%, and the oil price had quadrupled in a matter of months, as Arab nations cut supplies and production.

By contrast today the global economy is growing, the oil price has just halved in less than a year, and the latest reading of UK inflation was precisely zero. Any incoming government this May, faces economic challenges for sure, but not on the scale of those confronting Harold Wilson's minority government in 1974.

Wilson returned with a small majority in the second election of 1974, and over the next five years of Labour rule, the stock market rose by 368%.

This was in no small part down to a rebound from the extreme pessimism of 1974, at which time the UK stock market's Price/Earnings Ratio, a measure of confidence, stood at a record low of just under four times earnings. By 1979 it had risen to a more normal 12 times earnings, explaining a large part of the stock market's strong performance.

The Thatcher-Major Years 1979 - 1997

This period saw a booming stock market in the UK, which turned a £1,000 investment in 1979 into £20,000 by the end of 1997.

That's not to say there were no significant tumbles along the way. The 1987 market crash wiped 30% off share prices in a matter of weeks. 1992 also proved to be a white knuckle ride for investors, as currency traders forced the UK out of the European Exchange Rate Mechanism.

Strong stock market performance throughout this period was not limited to these shores though- a UK investor would have made just as much money from US stocks. Again, the trends affecting the UK stock market were felt across the globe.

Things can only get better

1997 to 2010 were the Blair-Brown years. This can be split into four distinct periods as far as the UK stock market was concerned: 1997 through to 2000 saw the rise of the dot.com bubble, as a wave of exuberance carried the UK stock market to highs only reached again this February.

The first three years of the new millennium witnessed the spectacular bursting of this bubble, amid a global stock market meltdown precipitated by the World Trade Centre attack, and the Enron accounting scandal.

The UK stock market found its nadir in March 2003, as the FTSE 100 hit a low of 3,287, less than half its current level. From that point until 2007, UK stocks were off to the races again, driven up by strong growth in company profits.

This all came to an end when the US 'sub-prime' fiasco kicked off what has now come to be known as the Global Financial Crisis. In the remaining years of Labour's rule under Gordon Brown, interest rates were cut to 0.5%, the banks were bailed out by the UK taxpayer, and Quantitative Easing began.

Once again the key events driving the UK stock market were those which happened on a global stage.

Strange bedfellows

This brings us to the current coalition government. In their five year tenure, the stock market has returned 55% to investors, although this has almost exclusively been a result of improving market sentiment, rather than any real growth in aggregate company profits.

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.

A global market

Looking back over the last 45 years then, the UK stock market has largely been driven by international trends and influences. This makes sense when you consider how globalised most industries are. The names of some of the biggest companies in the FTSE 100 index give us a bit of a clue to its international leanings; Royal Dutch Shell, HSBC (Hong Kong and Shanghai Banking Corporation), and British American Tobacco. Indeed around two thirds of the earnings of Footsie companies are estimated to derive from abroad.

The US is currently the biggest economy in the world and its stock market is commensurately influential. In fact 22 FTSE 100 businesses actually report their earnings in dollars. The waves caused by the potential for a Greek exit from the Eurozone amply demonstrate Europe has some considerable sway on UK stock prices too.

Chinese demand has in the past driven up the price of materials sold by Footsie stalwarts like Rio Tinto and BP, and now presents opportunities for companies like Pearson and Rolls Royce.

OPEC's decision to maintain oil production has slashed the cost of petrol and delivered a shot in the arm for UK consumers, and the businesses dependent on their spending habits. Meanwhile it has damaged the profitability of the oil and gas companies which make up such a large part of the UK index.

So whatever the outcome of the UK election, global trends and events are likely to continue to be the driving force behind the UK stock market.