By Chris Dorrell
Markets have shown little reaction to the news that Britain will be going to the polls on July 4, with the future path of interest rates still front and centre for investors.
Both the FTSE 100 and the FTSE 250 were essentially flat the day after the announcement.
It’s possible that there will be larger market movements as polling day draws near, particularly once the manifestos are published, but the prospect of a Labour government does not look like it will spook markets.
“The prospect of a government spearheaded by Sir Keir and Rachel Reeves is unlikely to spark the sort of fear that would have been inspired by an administration whose driving forces were Jeremy Corbyn and John McDonnell,” Russ Mould, AJ Bell’s investment director, said.
“The lack of available cash in the government’s kitty, the Conservatives’ occasionally frayed relationship with ‘business’ and the likelihood that Labour took on board Trussonomics’ lesson that unfunded promises could prompt chaos may all mean that investors could be in the mood to take Sir Keir Starmer’s big lead in the polls, and any eventual victory, in their stride,” he said.
Nevertheless, looking back, markets tend to perform better when the Conservatives are in government, with Margaret Thatcher’s second term proving to be the most valuable for markets.
Conservative outperformance is more stark when the impact of inflation is taken into account.
Mould drew particular attention to the Labour administrations of the 1970s, which generated healthy nominal returns but were effectively wiped out by inflation.
Simon French, head of research at Panmure Gordon, also noted that equity market returns tend to be higher under the Conservatives than under Labour.
However, French also pointed out that equity indices globally performed better during periods of Tory rule, something for which the Conservatives can hardly claim credit for.
“Looking at relative performance we note that under Labour governments, UK equities have performed in the middle of the international distribution, whilst under Conservative governments they have lagged,” French said.
