Markets stay steady as City braces for Labour victory
The City is readying itself for a Labour victory on Thursday but markets are sanguine over a potential change in government, according to analysts.
Sir Keir Starmer’s party is predicted to sweep the election, with the Conservatives expected to win only around 100 seats according to some polls.
“The only question is over the size of Labour’s majority,” said Neil Wilson, chief market analyst at Finalto.
Despite the unknowns of a new government, markets have remained steady and one month volatility for the FTSE 100 has stayed at relatively low levels.
“Despite the potential for political upheaval, historical data show that markets are typically resilient to election results, with minimal long-term impact on market trends,” said Matthew Belcher, investment manager at Square Mile Investment Consulting.
Vanguard examined the five months either side of every election since 1987, and found “no statistical difference” in the performance of a 60/40 UK portfolio between the period and other times in the market.
“Markets tend to shrug off election results; there may be wobbles in and around election day, but the general trend is almost totally unaffected by electoral developments,” Belcher added.
However, UK markets have been especially stable compared to movements in other countries heading to the polls this year, like France and the US.
Markets did not respond in any clear way when the election was called, nor to developments during the campaign, which Belcher said was “likely because many investors consider the result a foregone conclusion”.
The solid Labour lead and the more centrist programme expected from Keir Starmer’s government have reassured investors that he will not make any significant changes.
“Investors are not overly concerned about the election outcome as Labour today presents a much more moderate stance than under Jeremy Corbyn,” said Belcher.
Data from trading platform XTB revealed that among investors, Labour was viewed as more trusted for managing the stock market by a margin of eight points. This grew to a 20 point lead when managing the economy as a whole.
However, there are some in the City who are warning that a large ‘supermajority’ for Labour could still be a problem for markets.
Finalto’s Wilson warned that a Labour landslide “will matter to markets”, though this will “only really become clear once they start changing things”.
“I don’t think anyone really appreciates how radical they could be,” he said.
XTB’s research director, Kathleen Brooks, warned that any radical spending measures could trigger a similar crisis to Liz Truss’s mini budget fiasco.
“The biggest risk from this election is that the party who wins power over spends, which causes bond markets to revolt and bond yields to move higher,” she said.
While a hung parliament is unlikely, if the polls are significantly off and Labour fails to gain a majority, there could be “some volatility in UK asset prices,” she warned.