History shows UK markets lag briefly around polls - but beware of Brexit

Thu May 18, 2017 10:12am EDT
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By Jamie McGeever

LONDON (Reuters) - History shows British financial markets lag around election time, albeit not for long, but investors seeking parallels for next month's vote must beware of Brexit.

For decades stocks have particularly underperformed other world markets in the months following British parliamentary elections, and the 2001 and 2005 polls - which produced the kind of decisive result that markets also expect this time - may offer the best guidance.

With three weeks to go, analysis by Switzerland's UBS Wealth Management shows that the average underperformance of UK stocks against global stocks was 3.4 percent in the three months following elections held from 1970 to 2010.

Sterling and government borrowing costs also tend to drift lower in the weeks before and after general elections, although not by much and certainly nothing like the slump that followed the biggest British political shock of recent decades - the referendum vote in June last year to leave the European Union.

That's according to a Reuters analysis of the last five elections since 1997, which produced three outright victories for Labour and one for the Conservatives. In the other vote, 2010, the Conservatives emerged the biggest party but without a majority, resulting in a coalition.

Under the "New Labour" brand, Tony Blair scored wins early this century that were both convincing and unsurprising, as they had been clearly flagged in opinion polls. It appears to be a similar picture this time for the ruling Conservatives, with the only doubt in markets being the size of Prime Minister Theresa May's majority on June 8.

"This is not a tight election. It's probably going to be more like the New Labour re-elections of 2001 or 2005," said Jordan Rochester, currency strategist at Nomura.

With May promising tough policies such as removing Britain from the single European market entirely when it leaves the EU, the pound has developed some resistance to further surprises.   Continued...

FILE PHOTO: Euro and Pound banknotes are seen in front of BREXIT letters in this picture illustration taken April 28, 2017. REUTERS/Dado Ruvic/Illustration/File Photo