The two main parties have just unveiled their manifestos and verbal punches have started to be thrown in earnest, two sure-fire signs that a mass trip to the local school or town hall to drop a vote in a ballot box is imminent.
The prevailing market sentiment which has developed this year as the election loomed is that the uncertainty over the outcome and potential fallout which results is a good reason to sell down UK equities positions.
There is now a persuasive argument to be made that the situation has moved on from that point however, and sharp investors should switch back into buying mode rather than waiting until the dust settles after the election.
Everything seems to be in very good order for the UK economy. It could be argued that the election has been the only thing which pulled the FTSE 100 back when it first breached the 7000 barrier last month. Since then it has largely hovered at the same level, occasionally slipping back under that milestone. Take the election off the table and the brakes on further upside could come off.
Growth is at the highest level in the developed world at 2.7%, inflation is at rock bottom thanks to low oil prices, without slipping into market-worrying deflation levels, and Britain’s biggest trading partner the eurozone is on the up economically following the launch of quantitative easing. The US economy is also in fairly robust shape, which is always good for the wider world and Britain in particular.
Yesterday the International Monetary Fund offered independent confirmation of this sunny landscape by publicly patting the UK on the back for its ‘solid’ economic performance once again.
According to Rowan Dartington Signature’s Guy Stephens the election risk has been ‘widely over-exaggerated.’ If this is so, it implies that it is now fully priced in, and perhaps overly so.
“As in 1997, any fears regarding economic catastrophe following the general election are wide of the mark,” says Stephens said. “We are reminded of the market fear ahead of the arrival of the first Labour Government post the Thatcher era back in 1997 and an often used headline, ‘Will the last person to leave Britain please turn out the lights’. There was real fear at that time that the economy was doomed but it was actually no more than fear of the unknown and a removal of the familiar.”
One particular catalyst for UK share gains could be another coalition deal between the Conservatives and Liberal Democrats which nixes the former’s plan for a referendum on EU membership.
Having the Conservatives in power is generally perceived as being better for financial markets however this time around the threat of a referendum and subsequent exit from the EU has been cited as a big drag on market confidence.
Having a free market friendly Conservative government in power without any risk of ‘Brexit’ for another five years could be a big boost to UK shares shortly after 7 May.
While a Labour lead government brings some concerns of heavy-handed intervention in markets and higher taxes, it would also serve to take an EU referendum out of the picture.
Something else to consider is the fact that the big miners such as BHP Billiton and Rio Tinto have been a persistent drag on the index this year due to the fall in global commodities demand. ‘Miners drag FTSE lower’ is a familiar headline in recent times.
While passive UK equities funds are exposed to these companies as large parts of the index, active managers are free to side-step the miners and put more money into other sectors.
Financials are a good candidate at the moment as a destination for money that once may have been invested in the miners. Many have stockpiled cash very effectively since the crisis and are in a position to up their dividends anytime the share price needs a boost. According to analysis by Schroders, the sector is among the best in terms of payout ratio to dividend yield ratio, meaning they have more capacity to grow dividend than most other sectors.
Industrials are also well placed by this criteria, offering another good option for investors which hold the view that now is the time to buy UK names again, not after 7 May.
