It was 2 May 1997. Not only was most of the country celebrating the election of a bright young Kennedy-esque Prime Minister called Tony Blair, so too, perhaps more surprisingly, were the champagne-swilling Thatcherites of the City of London. As the government took office, the FTSE 100 index climbed up to 4,455, and it was to carry on rising over the next few months, reaching 5,193 by the year’s end. Indeed, for much of its first term, Britain’s last Labour government was accompanied by a raging bull market, as the dotcom bubble reached its peak.
Will history repeat itself? In May, we may well see another newly elected Labour prime minister, Ed Miliband. Unlike his predecessor Blair, Red Ed seems rather more committed to old-fashioned socialism.
Still, we can expect the market reaction to be very similar: an initial bull market, followed by a crash, the North profiting at the expense of the South, construction doing better but services worse, and the satellite companies of the state getting a fresh boost. If that happens, investors will have to navigate carefully to keep their portfolios intact.
The result of the election next May is too close to call. But the polls give Miliband the edge, and the electoral map favours Labour. There is a good chance that he will end up in No. 10 by the time next summer comes.
‘The markets don’t have a very kind view of Miliband, or his likely choice as Chancellor, Ed Balls,’ said Marc Ostwald, market strategist at ADM Market Services. ‘The most vulnerable market is sterling, and if sterling is vulnerable, the equity markets are too. As the election gets closer, there is going to be a lot more political risk priced into the market.’
Investors are certainly right to be cautious. It is an odd historical fact that since the second world war, investors — in equities, anyway — have lost money in real terms under every Labour government. By contrast, they have made it under almost every Tory one, with the exception of Ted Heath’s ill-fated government of 1970–1974. And yet, just as when Tony Blair took office in 1997, Miliband will be coming to power at the mid-point of a bull market, and one that could still have a fair bit of life in it. The bull run that started in 2009 may well be able to sustain itself through 2015 and 2016, and possibly even 2017. It is unlikely to make it all the way to 2020: to do that it would have to beat both the dotcom bubble that lasted a decade, and the great run up in equity prices of the 1920s that ended with the Wall Street crash, to become the longest bull market in history.
In fact, there are three reasons why equities might get an unexpected boost from an incoming Labour government. First, the threat of a referendum on Britain’s membership of the European Union will disappear. Miliband will be firmly committed to keeping the UK within the EU. Regardless of whether you think that is a good or bad thing, the markets hate the idea of the so-called ‘Brexit’. Sterling in particular would take a hammering, even if unfairly. With Labour in office, that debate would be shelved, at least for five years, which, for the traders in the City, is the same thing as for ever.
Next, Ed Balls as Chancellor would relax George Osborne’s austerity programme. Labour would be firmly committed to spending more money than the Tories had done, and would borrow the money rather than putting up taxes. It might be bad for the national debt, but a splurge of government spending would help the big retailers, and would give house prices another push. The stock market is heavily dependent on those sectors. If they do well, the markets will rise even if everyone knows there is a bill falling due one day.
Finally, interest rate rises would be postponed. The Bank of England has been looking at raising rates next spring, so May might see the first hike. But it is unlikely the Governor of the Bank of England, Mark Carney, would want to greet new Chancellor Balls by lifting rates. Balls isn’t the kind of man who would forget that in a hurry, or wouldn’t look for some payback one day. Carney might well decide to give the new government some breathing space, and shelve a rate rise for another six month — and the longer rates stay at record lows, the better for stocks.
That said, there would also be some significant headwinds. Labour is planning to take money out of the market. One reason the FTSE did badly under the last Labour government was Gordon Brown’s infamous raid on pension funds. Since they are the main source of cash flowing into stocks, the less pension funds have to invest, the less demand there is, and the less prices rise. Miliband and Balls look like repeating the trick. Labour has already announced plans to restrict tax relief on pension plans for people earning more than £150,000 a year, and left-leaning think tanks have been pushing schemes to restrict the tax breaks on saving for retirement even further.
Next, sterling might well weaken. Higher spending, and less austerity, might help the equity markets, but the currency markets will hate it, and sterling might well slide. That might be good for exports, but it will hit the value of equities, especially if the global funds that dominate the market reduce their exposure to the UK.
At the same time, investors will need to choose their sectors carefully. Miliband and Balls have already targeted specific industries. They are threatening price controls on electricity companies, and a break-up of the main high street banks. Banks and utilities make up some of the biggest names in the FTSE — HSBC, Lloyds and Barclays are all in the top 20 companies in the UK measured by market value, while utilities such as BG, National Grid and Centrica are all in the top 40. Expect their share prices to go into decline, and with big names like that going down it will be hard for the FTSE to make much progress.
If Labour gets a taste for meddling with price controls, it probably won’t stop there. Why not put caps on water, broadband and telecoms prices as well? A limit on Sky Sports subscriptions would go down well in the Labour heartlands, as well as cheering the Murdoch-hating activists. Insurance prices could be controlled, and so could rents. A new level of political risk will have been introduced to the market, so that even if those things don’t happen, the nagging fear that they might will keep share prices subdued.
Against that, some sectors will do well. Construction should profit because an incoming Labour government is likely to be keen on a blast of infrastructure spending to boost economic growth, with materials companies and engineering groups also benefiting. The outsourcers that get big government contracts, such as Capita, might also be worth looking at. So might some regional players. The North generally grows more prosperous under a Labour government, because public spending plays a bigger role in its economy. A company like the supermarket chain Morrisons, which still has its heartland in the North, might be worth a look. So might chains such as Poundland that do well in Labour’s heartlands. The bookies might be worth backing, and so might the pub chains. Those companies do better when the poor have more money.
And yet, in reality, equities, currency and bond markets are all global. What the Federal Reserve finally decides to do about interest rates, whether the European Central Bank ever gets around to launching its own version of quantitative easing, and whether China manages to keep clocking up 7 per cent-plus growth rates without crashing, all matter far more than anything the Red Eds get up to in Britain. In fact, if the bull market keeps going until 2017 then crashes spectacularly, the markets are much more likely to determine Miliband’s fate than he theirs.