Articles - Are investors worrying too much about UK politics?

Britain’s economy looks stronger than most of the Eurozone economies, but you would not know it looking at stock market movements since the start of 2015. The main European stock market index has risen by more than 8 per cent since the start of the year, more than twice as far as the UK FTSE 250. That’s despite the uncertainties hanging over the future of Greece, which many fear could trigger a resumption of the Eurozone crisis.

 By Stephanie Flanders, Chief Market Strategist for UK and Europe, J.P. Morgan Asset Management
 It also ignores the fact that the UK is likely to grow more than twice as fast as the Eurozone in 2015 – by around 2.75%. Even if everything goes fairly well in Europe, the UK is also likely to grow faster than its neighbours across the channel next year and the year after that.
 You might wonder, then, why investors are not flocking to the UK? There are two answers to that. One is the peculiar composition of the FTSE 100. Our biggest companies earn the majority of their revenues overseas, and a disproportionate number earn their money from oil and other commodities. There are question marks over both of those revenue sources going into 2015.
 The other big stopping point for investors is politics. There is every chance of a hung parliament after the May general election, and much less chance of stable and enduring coalition than there was in May 2010.
 Assuming that one of the two main parties manages to cobble something together, it’s not even obvious who the typical global investor should be rooting for.
 Usually it would be the prospect of a left wing Labour leader gaining power that would be frightening the city. But unlike David Cameron, Ed Miliband has not committed to holding a referendum on staying in the EU. For many in the square mile, that is a more worrying prospect than even a mansion tax or the reappearance of the 50p top income tax rate.
 All of which spells trouble, you might think. But I would caution against making easy assumptions about the relationship between politics and economics. Markets were serene when the UK did not have a government for several days after the 2010 election.
 True, it helped that investors had bigger things to worry about in May 2010 – like the eruption of the Eurozone crisis. But in a mature advanced economy like the UK it’s easy to overestimate the short-term impact that politics can have on growth. In a crisis, the right kind of government action can be crucial. But the rest of the time – not so much.
 Take the US, where politics has been gridlocked for the best part of a decade. In the dark days of the banking crisis, is was vital that the President and the central bank could act to restore confidence. But since then the economy has been ticking along perfectly well, despite the worst efforts of Washington’s warring politicians.
 We are not back to normal. But our economy is on a much more even keel now than we were a few years ago. Fingers crossed, that means even a very messy election result will be not be enough to blow Britain’s recovery off course.

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