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UK Election and Equity Markets

12 June 2017PoliticsEconomicsUK
  • The UK General Election last week was the 20th since 1945. Prior to this, there have been 9 majority victories for the Conservative party, 9 also (including one minority government) for the Labour party and one Coalition government.
  • On average, UK shares have performed worse than average rolling returns since 1945 in the 3- and 6-months following the previous 19 elections.
  • However, the average 12-month returns post elections is 14.6%, higher than the rolling average of 13.4% since 1945.
  • UK equity markets have historically been stronger in the 3-months ahead and after elections with a Conservative victory, but average 12-month returns have been stronger in the case of Labour victory. Citi analysts argue that 6-12 month equity market performance have been often driven by factors and trends away from domestic UK politics, eg global economic recession/recovery, oil crisis, conflict, global profit cycle etc.

  • A Conservative majority outcome would likely have had little impact on financial markets. A Labour-led government would likely have had a significant impact on UK financial markets, especially via a sharply weaker GBP.
  • In this case, the final result of a hung parliament is likely to see GBP modestly weaker.
  • Almost 70% of sales from UK listed companies come from outside of the UK. Given that the Pounds (GBP) could fall to 1.25 versus the USD, this may likely provide some support for UK equities.
  • In addition, many of those (UK stocks) have dividend yields over 3%, so the downside for the FTSE 100 could be limited.
  • Citi analysts are neutrally weighted in UK large-cap equities and underweight in mid and small cap equities.

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