UK financial markets prepare for post-election bumpy ride

Financial markets are gearing up for an uncertain post-election period as investors face the possibility of a power vacuum at Westminster while also weighing up the impacts of individual policies for shares.

Sterling may also face a tough time, with the Bank of England recently warning that the UK’s swollen current account deficit could see markets turning against the country in “adverse circumstances”.

Sir Martin Sorrell, boss of advertising giant WPP, has said the general election will hurt business, whichever of the two main parties is in government.

In March, Sir Martin said a Conservative victory would create the uncertainty of a referendum on staying in Europe in 2016 or 2017 while Labour appeared to be campaigning on a “bashing business” platform.

The CBI, which maintains political neutrality, has expressed concern about the possibility of a Labour government intervening in the energy sector and other markets – but also said it was “not very keen” on the Tories’ migration targets.

Hargreaves Lansdown analyst Steve Clayton said: “A Tory victory, or Tory-led coalition, is probably the market’s first choice, certainly for financial services sectors and utilities. But investors did not do too badly under Labour, personal taxation aside.”

Among individual sectors, energy stocks will be in sharp focus after Labour leader Ed Miliband’s pledge to freeze prices and hand more power to regulator Ofgem.

Mr Clayton said that shares in British Gas owner Centrica and SSE could “enjoy a bounce if Mr Miliband does not make it through the door of No 10”.

Banking may be another sector where Labour policies cause a hit. Mr Clayton cited proposals for a hike in the banking levy to pay for increased childcare, as well as a bonus tax to fund a jobs guarantee for young people.

Britain’s house-builders will be watching the results closely too as they could be “both winners and losers from the election”, he added.

A surge in house-building under Labour could mean growth in the lower margin social housing end of the sector while a mansion tax could bite at the top end.

Meanwhile, the Hargreaves Lansdown analysis cited potential Labour moves for an end to zero-hours contracts, an increase in the minimum wage and a push for the “living wage” as likely to be unwelcome for high street retailers.

Higher staff costs would seem likely to hit high street firms competing against online retailers with fewer staff to support – though, in the longer run, “if people have more money in their pockets, retailers could still be winners from the changes”.

In the lucrative outsourcing sector, the last election showed that “a change of colour causes inertia in the civil service”, Mr Clayton said.

This could prove another blow to Serco in its latest turnaround efforts though leaving rival Capita better set with minimal re-bids and contract expiries due over the next five years.

In transport, a review of the rail franchise system under Labour could leave privately-owned train operators such as Stagecoach and First Group with more uncertainty, the analysis said.

The question of the future of Heathrow and the South East’s broader airport capacity would also surface soon after the election, with big construction firms such as Kier, Balfour Beatty or Carillion likely to benefit if it resulted in a major building project.

James Bateman, head of portfolio management at Fidelity Solutions, said key uncertainties for investors could be over the shape of the new government, its ability to implement policy, and the risks posed by the policies.

He said: “A hung parliament after the General Election would likely spook UK equity markets, and the potential for a prolonged political stalemate could see them fall in a relatively quick period, perhaps by as much as 5-15%.

“There is also the risk of an ‘illegitimate’ minority government, where the largest party in terms of seats isn’t in power. This could cause markets to constantly price in the possibility of an early dissolution, meaning significant uncertainty.

“While it’s unlikely that any of the major parties would be able to enact their manifestos in full, some of their individual policies would cause significant uncertainty for markets if implemented.

“For instance, the Conservatives’ promise of an EU referendum, or Labour’s interventionism among particular sectors such as energy or banking, or any further threat of Scottish independence by the SNP, would all pose considerable risks.

“Many of the possible scenarios I’ve outlined could cause a sudden and potentially dramatic fall in sterling in the shorter term.”