UK election: The outlook for stocks

Although the FTSE hit a fresh record high recently, this came after a laborious two years of trying. It has underperformed compared to some of its European peers so far this year, including the German DAX index. The commodity-heavy FTSE index has been held back by the slump in commodity prices which has weighed heavily on the share prices of energy and mining companies. The relatively small number of technology stocks – a sector which has given the US markets a major boost recently – has also held back the UK index. Nevertheless, we think that the ECB’s QE programme and the record low interest rates across many developed economies, including the UK, combined with a much weaker oil price will spur economic growth in the Eurozone – the UK’s largest trading partner – and help push the FTSE to much higher levels in the coming months. We also think that oil prices may bottom out around the middle of 2015 as US shale producers are forced to cut back production due to oil prices remaining weak for a prolonged period of time. This could be good news for the London-listed energy stocks. But the ongoing uncertainty surrounding the UK election is likely to hold some investors back for the time being. Once the elections are out of the way, and depending on its outcome (see above for details), investors may decide it is time to pile into the UK stock market. That said, the FTSE is comprised mainly of large multinational corporations and as such the outcome of the election may not have a lasting impact on the FTSE, though certain stocks or sectors could be affected nonetheless.

Heading into the elections, the FTSE is looking strong from a technical point of view. After all, it has breached the psychologically important level of 7000 for the fi rst time ever. It has therefore also cleared the 6900 hurdle which had provided stiff resistance for the best part of two years. With these levels fi nally broken, the FTSE could be gearing up for a major rally as fresh would-be buyers may decide now is the time to come into the market. As the FTSE is trading in unchartered territories, there are no prior reference points for traders to keep an eye on. This is where Fibonacci extension levels come handy. On the chart we have plotted the Fibonacci extension levels of the last three notable price swings, from point X to A, B to C, and D to E. These extension levels could potentially turn into resistance as some speculators would use them as their long profi t targets or short entry points. Our short-term view would turn bearish on the FTSE upon a potential break below 6900 or the bullish trend line. Should that happen then the index may make a move towards support at 6715 before deciding on its next move.

FTSE’s performance one year after past elections

The table below shows the FTSE’s performance a year after each of the past six elections.

 

At first sight, it is diffi cult to draw any conclusions from the table above. But looking at the average performance of the FTSE a year after the elections, the data shows a surprising result: 



Despite the perception that the UK markets would perform well under the Conservatives, which is deemed a more business-friendly party, the FTSE has actually performed much better in the fi rst year under a Labour party. In the past six elections, the FTSE has gained an average of 1022 points in the fi rst year after a Labour win. In contrast, it has fallen by an average of 192 points during the fi rst 12 months under a Conservative government. Though the FTSE’s gains under the Conservatives improves when you take into account their current coalition with the Lib Dems, the overall average gain of 6% at the party’s one-year anniversary in power is still well below Labour’s 24.8%. Thus, if this trend continues then a Labour win, all else being equal, would be better for the FTSE – at least in the party’s fi rst year anyway. However, the above fi ndings have not taken anything else into account. Even if the UK elections do play a big part in the FTSE’s direction, it could be that the outcome was already fully or partially priced in. What’s more, the FTSE’s components have changed over these years and not only that but the companies themselves have become more internationally focused and less dependent on the UK economy, let alone politics. That being said, the biggest risk for the FTSE could be if we get a hung parliament. Even if this potential outcome has no economic impact, the uncertainty that comes with it may well undermine the appetite for risk.