On a knife edge
Author: Cathy Dixon
As I write, four days after the election, we are still no clearer on who will form the next UK government, following an election campaign, which, thanks to the medium of television and the Leaders’ Debates, was transformed into a hotly contested fight-to-the-wire spectacular. In last month’s article we commented that equity markets would probably ignore the daily opinion polls and chart their own course. This was based on evidence over a long number of years that election campaigns generally have very little impact on markets
We were right in part: the run-up to the election itself, whilst riveting, seems barely to have registered in commentaries on UK equity markets, but, goodness, what a month it has been for the market!
In the last two weeks of the campaign the FTSE 100 fell by 400 points, with falls of around 140 points on each of two days. This had little to do with the election and everything to do with the precarious economic situation in Greece, tightening of monetary policy in China and plans for a ‘supertax’ on the profits of mining companies in Australia. Interestingly however, as government bond prices in Portugal and Spain began to fall on the back of worries about contagion from Greece, the UK Gilt market strengthened, with investors seeking refuge from the falls in the equity market.
And so on to polling day. At first a strange calm seemed to pervade the equity market and share prices marked time, but by the end of the day the volume of trading had picked up and a sell-off in banking stocks (further fears over the exposure of UK banks to losses in Europe) led the FTSE down by 80 points. Still no news on the election however.
As television coverage of the results began, startling news came from the US of a fall of almost 1000 points in the Dow Jones (nearly 10 per cent). The cause has not yet been determined, although conventional wisdom has it that a ‘fat finger trade’ by a dealer erroneously entering a sale of billions, not millions, caused the chaos.
The news on Friday morning that no UK party had achieved an overall majority clearly disappointed the market: share prices gyrated wildly on every piece of news regarding talks between one or other party and the leading indices closed down around two and a half per cent. Once again however, it seems that the election result was a sideshow to the real issue: the future of the Eurozone. As the domestic wrangling continued over the weekend, EU finance ministers meeting in Brussels wrestled with a huge rescue package for vulnerable member states.
So, some time has been bought not just for the Eurozone, but for the UK, before the new government commences the massive task of bringing the budget deficit under control. Investors remain on a knife edge waiting to see what each will bring.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of Smith & Williamson Investment Management.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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