UK equity investors upbeat - regardless of election risk

Markets are said to hate uncertainty. Yet the certainty of uncertainty has been causing UK equity investors little concern.

The FTSE 250 index - generally seen as a better proxy for UK industry than the FTSE 100 - is at a record high, having risen 11 per cent in the year to date. Its valuation of 18 times 2015 earnings is the richest in at least a decade.

"We find that most investors assume that May elections will be messy, suggesting that this is by now a consensus concern," said Mislav Matejka, a strategist at JPMorgan Cazenove. "The problem, though, is that the politics could indeed be quite challenging, and we do not find that the markets are pricing much of that in."

Historically, the FTSE outperforms global benchmarks in the month following an election by 5 per cent if the Conservatives win, and underperforms by 1 per cent on a Labour victory, Credit Suisse data show. The range of possibilities, however, makes such precedents almost irrelevant: 1974's twin elections delivering a hung parliament and a slim Labour majority led UK equities to underperform by 20 per cent.

Against the market rally, some stocks already reflect political risk. Labour's pledges to reform the power industry have contributed to Centrica, the British Gas owner, underperforming the FTSE by 30 per cent during the past year.

Deutsche Bank analysts draw a parallel with the 1992 election, when Labour stood on a platform of renationalising the utilities. The sector soared by about 20 per cent on the day after an unexpected Conservative victory.

A less risky bet, according to Barclays, could be to sell sectors such as general retail whose fates are pinned to consumer confidence. It said: "Irrespective of whoever forms the next government, given the prospect for tighter fiscal policy going forward, the pattern of declining consumer confidence that has characterised the first two years of every parliament since the early 1970s looks likely to be repeated."

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