Date: 16 Apr 2015, Economics and Finance
Question setter: John Kay

FTSE All-Share Post Election

What are the implications of the UK general election for stock market levels - will the FTSE all-share index be higher at close on Thursday 14 May than on Thursday 7 May?


Response:


Answer: No
Confidence level: 7%
Mean confidence level (all requests): 20.00%

Justification:
Markets have been "climbing the wall of worry" since the beginning of the year, with poor returns in other asset classes helping equities. There has been Eurozone growth and a reasonably benign economic scenario in the UK but a combination of difficult circumstances will refocus attention on the perils of the next parliament. Overseas there is slowing global growth and the realisation that Greece really will leave the Euro will blight European expectations. As each month goes by we get closer to the end of QE in the US, which has bouyed equities there while earnings disappoint. Most pertinently the election here, whatever the outcome, will portend a period of austerity more genuine and severe than the last where deficits were barely tackled. If it is a Labour government, supported by the SNP this will be against the background of bribes to the Scots. If Conservative, they will have to cobble an alliance with the Liberals again but almost certainly have to appease UKIP in many instances. This may increase the possibility of the UK quitting the EU and spook the markets. Certainly the election will have an impact - it will just be a question of how long markets take to react.

Outcome: Yes
Score: -7
Mean score (all respondents): -20.00

Expert opinion:


Answer: Yes

Selected Expert Answer from Mettletest Panellist:
There is huge uncertainty about the outcome of the 2015 election, with a high possibility that the "winner" will rely on support from a political outlier with a more radical agenda than either of the two main parties. Despite this prospect, the FTSE all-share has risen some 8% since the start of the year, which suggests that investors are giving weight to other factors and could continue to do so in the immediate aftermath of the election result. These factors include the better growth in the Eurozone, low oil prices and the continued supply of easy money in the US, as well as home-grown growth. Moreover, cash levels in the UK remain relatively high, earning little interest, meaning it's less likely to trigger any great sell-off int the equity markets. A probable scenario is the FTSE all-share will be moved by international markets and any major financial news, including what happens to Greece up until a week or so before the election. We may then see some nervous hedging and selling bringing levels down a little. Once the result is known, attention will refocus on individual company winners and losers with a positive move for the market overall. The immediate implications of the election are quite small.


Outcome: Yes

Comment on outcome from Mettletest Panellist:
At the close of business on 14th May, the FTSE all share index stood at 3,782.49, having fallen to 3726.25 on the day of the election. It rose above 3800 the day after the election when the country and the market reacted to the surprise outcome of a clear Conservative victory and majority. The move was then tempered by a pull-back. Investors like the pro-business stance of Cameron's government but dislike the uncertainty of the EU referendum, slower growth forecasts and possible disruption as Greek default and Euro exit risks loom. As predicted, worries immediately before the election knocked the market back and once the result was known a rally ensued. Would this have happened with a different electoral outcome?