There are now less than 100 days to go until the UK electorate decides which party should govern the country or, as looks to be most likely, which parties will make up a coalition that does so. In fact, investors seem to be rather relaxed at present regarding the possibility of another coalition government and, even though it remains wide open as to whether it will be a Labour or Conservative-led coalition, the FTSE 100 remains buoyed by an improving economy and better outlook for Europe.
The Run-Up
However, as we get nearer to the election, investors may begin to price in a discount of sorts for the possibility that there is a period of uncertainty following the election. Certainly, last time around there was uncertainty but, crucially, it involved just three political parties (Labour, Conservatives and Liberal Democrats) who were capable of forming a coalition. This time around, there are any number of possible coalitions and there are at least six parties (the above three plus UKIP, the SNP and Plaid Cymru) who could be involved in discussions to form a coalition.
So, while in 2010 it was fairly orderly, this time around it could be markedly less so and, as a result of this, the FTSE 100’s price level may start to factor in an ‘uncertainty discount’ which could hold it back, to a degree, over the next few months.
The Aftermath
While there are a number of different parties that could end up in government, there are realistically only two people that could become Prime Minister: David Cameron and Ed Miliband. Clearly, the FTSE 100 would perform better in the aftermath of the election if the former continues as Prime Minister, since he is a known quantity and offers less uncertainty than the latter.
In addition, a Cameron-led government would also likely be seen by investors as less risky than a Miliband-led one. That’s because the last five years have seen the UK economy turnaround from being one of the hardest-hit economies in the developed world to being one of its star performers. Of course, David Cameron cannot take all of the credit: low interest rates and quantitative easing have also made a major impact, but he will probably be viewed as more economically credible than Ed Miliband due to having a better track record when it comes to balancing the UK’s books.
That’s not to say that David Cameron would do a better job than Ed Miliband moving forward, but rather that their respective periods in government show that the former has a more cautious track record when it comes to borrowing. This could cause investors to favour a Cameron-led government in the short term.
The FTSE 100
While most stocks listed on the FTSE 100 do not rely upon the UK for most of their profit, their share prices could still be hurt in the short run by the uncertainty surrounding the General Election. And, for those that do, such as banks, energy suppliers and retailers, they could underperform in the run-up to the election, as well as afterwards, depending on the outcome.
Clearly, the General Election remains a big deal to investors and, while it could mean instability for the FTSE 100 in the short term, the index continues to have a very bright future and looks all set to deliver excellent growth in the long run.
