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Would “more of the same” be the best election outcome?

25 March 2015

A Tory majority appears more attractive at the moment than any of the alternatives on the table and the markets would appear to be pricing that in, says Rowan Dartington Signature’s Guy Stephens.

By Guy Stephens,

Rowan Dartington Signature

The UK equity market finally broke through 7,000 last week following the chancellor’s Budget. This is a ringing endorsement of the measures he announced and is not atypical of the increased likelihood of a Conservative Government and buoyant equity markets.

However, positive movements in the mining sector were more responsible for the move – but George Osborne will take the plaudits no doubt.

One interpretation of the well-received Budget is that it makes it more likely that the forthcoming election will return the Tories back to power and that voters will likely stick with the incumbent as, on balance, George Osborne has made a decent job of getting the economy back on its feet.

It is factually true that unemployment has fallen considerably, economic growth is robust, the budget deficit is at last falling and business investment is recovering, if not gaining strong momentum.

Price performance of FTSE 100 over 3yrs

 

Source: FE Analytics

The election polls are still showing this to be far from a foregone certainty and that a hung parliament is still likely with a messy coalition process on the 8 May when we will know the result.

There is increasing talk of an outright Conservative majority which would be a market friendly outcome. A change at Number 11 would set a cat amongst the pigeons due to the uncertainty, although in reality, the degree of policy change may actually be relatively minor involving mainly welfare, spending and healthcare.

Lessons can be learnt here from Europe where welfare reforms continue to be a stumbling block.

The more generous the compensation for not working, the less likely individuals are going to improve their lives through enterprise and hard work. Looking after the poor and disadvantaged is necessary and part of the responsibility of the state, but it should be a two-way agreement to get people to help themselves rather than engender a belief that the state owes them a living.

This lies at the heart of the problems in France and continues to restrain their economic growth and job creation. We live in a capitalist world which requires entrepreneurship, investment and reward for risk taking.

This appears at odds with some of the fundamental tenets of modern socialism, which seeks to increase the size of the state through higher taxes and spending.

There are some services which require the state such as healthcare, defence and education, but arguably job creation and business investment should be naturally occurring phenomena, which happen due to the environment the government creates to stimulate this.

There has been very little said by the Labour Party as to how it will partner with the business community if elected, and this was a key part of the New Labour mantra of Tony Blair which led to his success.

Perhaps both main parties will announce various attractive initiatives once the televised debates are behind us.

At the moment, more of the same appears considerably more attractive than any of the alternatives on the table, and the markets would appear to be pricing that in. Even if there is a change in administration, is it really going to be that different outside of a few billion spending here and there?

If a Tory outright majority is returned, that would be bullish, but a huge ‘if’ remains and such a result is contrary to the current polls. But as Israel has shown, they can be very inaccurate.

Guy Stephens (pictured on page 1) is a director at Rowan Dartington Signature. The views expressed are his own and should not be taken as investment advice.

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