EU in-out vote may hit markets

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Europe - May 2015

Election fever has gripped the UK populous in the past few weeks.

David Cameron has appeared in all four regions of the UK in one day, Ed Miliband has glared unnervingly into the cameras on televised debates, Nick Clegg has visited a hedgehog sanctuary in Solihull, while Nigel Farage drank beer wherever he could.

This cohort has been joined by another key player – Nicola Sturgeon has seen her political star rise rapidly since Alex Salmond stepped aside as leader of the Scottish National Party.

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From an investment perspective, does it really matter which party or, more likely, which coalition of parties takes the keys to number 10 Downing Street on May 7?

Since the Conservatives and Liberal Democrats formed an alliance in 2010 – in itself a bit of an oddity given that the UK normally has single-party rule – the UK has been performing quite well. Rising employment has become one of the key drivers of the economic recovery, tax revenues have been rising, exports are starting to improve and consumer confidence is at a 12-year high.

Admittedly, the coalition did not meet its target of eliminating the deficit by 2015, but overall the alliance could be deemed a success.

Maintaining this status quo would be judged the most positive outcome by investors as it means more of the same for the next few years. The biggest risk for markets within this scenario is Mr Cameron’s promise of a European Union (EU) in-out referendum in 2017. This has even spawned its own word – ‘Brexit’.

Perhaps this is a political ploy aimed at disaffected Tory supporters swaying towards UKIP, but investors should be concerned about the implications this could have on UK businesses, many of which rely on the EU as a key trading partner.

A Labour-led coalition, on the other hand, could bring in policies that may cause more concern for the UK. There could be several equity sectors, such as banks and utilities, taking direct hits from newly imposed taxes and tariffs.

Huge bank balance sheets are a prime target for raising the money needed in Mr Miliband’s economic plan to rebalance the economy in favour of the “99 per cent”. Also, bankers will face an additional tax on bonuses in order to pay for a Compulsory Jobs Guarantee for the young and unemployed.

While these policies will prove popular with voters aghast at the amounts some bankers are paid, if enacted the measures could damage the UK’s reputation as a base for some of the world’s largest financial institutions.

Labour has also promised a freeze on gas and electricity bills until 2017, and this will have a direct impact on the bottom line of the UK’s utility sector – a key element in many income portfolios.

Of course, these plans could be watered down post-election as the nature of coalition government tends to see parties move towards the centre of the political spectrum.