Election 2015: Why the City wants to avoid instability

Business leaders are looking for stability. (PA Wire)
Business leaders are looking for stability. (PA Wire)
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When it comes to the City’s priorities for the next Government, instability is the worst threat.

The City sees pros and cons to both Labour and the Tories, but ultimately it wouldn’t care who won as long as they had a clear majority without having to get into bed with Nigel Farage or Nicola Sturgeon.

While it would rather not have Labour’s curb on banking profits and interference with the markets, equally it would rather avoid the Tories’ plans for a referendum on Britain’s membership of the EU.

So the City sees that both sides have pros and cons, but a firm majority for either is much better than the threat of the SNP or UKIP voting down a budget or even worse, a political void where nothing gets done and the possibility of a second election which, as Ken Clarke said over the weekend, will in all likelihood have the same result as the first.

​As a result f​inancial markets are gearing up for an uncertain post-election period as investors face the possibility of a power vacuum at Westminster while also weighing up the impacts of individual policies for shares.

Sterling may also face a tough time, with the Bank of England recently warning that the UK’s swollen current account deficit could see markets turning against the country in “adverse circumstances”.

Sir Martin Sorrell, boss of advertising giant WPP, has said the ​G​eneral ​E​lection will hurt business, whichever of the two main parties is in government.

Sir Martin said a Conservative victory would create the uncertainty of a referendum on staying in Europe in 2016 or 2017 while Labour appeared to be campaigning on a “bashing business” platform.

The CBI, which maintains political neutrality, has express-ed concern about the possibility of a Labour government intervening in the energy sector and other markets – but also said it was “not very keen” on the Tories’ migration targets.

Hargreaves Lansdown analyst Steve Clayton said: “A Tory victory, or Tory-led coalition, is probably the market’s first choice, certainly for financial services sectors and utilities. But investors did not do too badly under Labour, personal taxation aside.” Among individual sectors, energy stocks will be in sharp focus after Labour leader Ed Miliband’s pledge to freeze prices and hand more power to regulator Ofgem.

Banking may be another sector where Labour policies cause a hit. Mr Clayton cited proposals for a hike in the banking levy to pay for increased childcare, as well as a bonus tax to fund a jobs guarantee for young people.

Britain’s housebuilders will be watching the results closely too as they could be “both winners and losers from the election”, he added.

A surge in housebuilding under Labour could mean growth in the lower margin social housing end of the sector while a mansion tax could bite at the top end.

James Bateman, head of portfolio management at Fidelity Solutions, said key uncertainties for investors could be over the shape of the new Government, its ability to implement policy, and the risks posed by the policies.

He said: “A hung parliament after the General Election would likely spook UK equity markets, and the potential for a prolonged political stalemate could see them fall in a relatively quick period, perhaps by as much as ​five to 15 per cent​.

“There is also the risk of an ‘illegitimate’ minority ​Government, where the largest party in terms of seats isn’t in power. This could cause markets to constantly price in the possibility of an early dissolution, meaning significant uncertainty.

“While it’s unlikely that any of the major parties would be able to enact their manifestos in full, some of their individual policies would cause significant uncertainty for markets if implemented.”

This time tomorrow the City hopes to have its answer but it looks like nothing will be decided for some time.

For those of you voting today, think long and hard before you give your vote to a marginal party whose interests fall outside that of the UK’s long-term stability.