The colour of money

THE stock market has performed twice as well under a Conservative government as it has under Labour, according to performance statistics dating back to 1970.

But the facts behind the raw numbers suggest events taking place on the global stage are far more important to the UK stock market than the next resident of Number 10, Downing Street.

That is perhaps for the better, given the electoral cycle often seems to imbue our political leaders with a breathtaking sense of short-termism. Over the last 45 years there have been five Conservative governments, five Labour governments, and the current coalition.

Over that time the UK stock market has returned, on average, 16pc a year under Conservative rule, compared with 9pc under Labour. Mar- kets can be capricious beasts in the short term, but this reflects the growth in UK company profits under the two parties; earnings grew by an average 11pc a year under the Con- servatives, compared with 6pc a year under Labour.

1974: A BLUEPRINT FOR 2015?

The headline statistics conceal some dramatic detail though.

The Labour minority government which held power from February to October 1974 presided over a near-50pc fall in the UK stock market.

The polls for the forthcoming General Election in May indicate there is a good chance of a Labour minority government this time around. But before you cash in your pension and head for the hills, it is worth reflecting on how economic conditions are markedly different today.

In 1974, the world was mired in a global recession, UK inflation was closing in on 20pc and the oil price had quadrupled in a matter of months as Arab nations cut supplies and production.

Today, the global economy is growing, the oil price has halved in less than a year and the latest reading of UK inflation was precisely zero.

Any incoming government this May faces economic challenges for sure, but not on the scale of those confronting Harold Wilson’s minority government in 1974.

Wilson returned with a small majority in the second election of 1974 and over the next five years of Labour rule the stock market rose by 368pc.

This was in no small part down to a rebound from the extreme pessimism of 1974. At the time the UK stock market’s price/earnings ratio, a measure of confidence, stood at a record low of just under four times earnings.

By 1979 it had risen to a more normal 12 times earnings, explaining a large part of the stock market’s strong performance.

THE THATCHER-MAJOR YEARS

The winter of discontent in 197879 handed an election victory to the Conservatives, who held power for the next 18 years, first under Margaret Thatcher and latterly under John Major. This period saw a booming stock market in the UK, which turned a £1,000 investment in 1979 into £20,000 by the end of 1997.

That’s not to say there were no significant tumbles along the way. The 1987 market crash wiped 30pc off share prices in a matter of weeks. And 1992 also proved to be a white knuckle ride for investors, as currency traders forced the UK out of the European exchange rate mechanism.

Despite these setbacks, the overall direction of travel was positive in the 1980s and 1990s, though strong stock market performance was not limited to these shores – a UK investor would have made just as much money from US stocks.

THINGS CAN ONLY GET BETTER

The period between 1997 and 2010 was the Blair-Brown era. This can be split into four distinct periods as far as the UK stock market was concerned: 1997 through to 2000 saw the rise of the dotcom bubble, as a wave of exuberance carried the UK stock market to highs only reached again this February.

The first three years of the new millennium witnessed the spectacular bursting of this bubble, amid a global stock market meltdown precipitated by the World Trade Centre attack and the Enron accounting scandal.

The stock market found its nadir in March 2003, as the FTSE 100 hit a low of 3287, less than half its current level.

From that point until 2007, UK stocks were off to the races again, driven up by strong growth in company profits. This all came to an end when the US ‘sub-prime’ fiasco kicked off what has now come to be known as the Global Financial Crisis.

In the remaining years of Labour’s rule under Gordon Brown, interest rates were cut to 0.5pc, the banks were bailed out by the UK taxpayer, and quantitative easing began.

STRANGE BEDFELLOWS

This brings us to the current Coalition government.

In its five-year tenure, the stock market has returned 55pc to investors, although this has almost exclusively been a result of improving market sentiment, rather than any real growth in company profits.

Many would point to the vast monetary stimulus packages launched by central banks as the driving force behind this expansion in optimism. Those same voices would also question, with some justification, what happens when the music stops.

In particular, the impending decision of the US Federal Reserve to raise interest rates promises to be a symbolically significant moment, even though the actual increase announced is likely to be negligible.

Consensus suggests this potentially game- changing moment will happen this summer, which would almost certainly eclipse the UK election result in terms of its importance for the UK stock market.

A GLOBAL MARKET

Looking back over the last 45 years, the waxing and waning of the stock market has been driven in large part by overseas influences, and is not commanded from Westminster.

This makes sense when you consider how globalised most industries are.

The names of some of the biggest companies in the FTSE 100 index give us a clue to its international leanings: Royal Dutch Shell, HSBC (Hong Kong and Shanghai Banking Corporation), and British American Tobacco. Indeed, around two-thirds of the earnings of Footsie firms are estimated to come from abroad.

The US is currently the biggest economy in the world and its stock market is commensurately influential. In fact 22 FTSE 100 businesses actually report their earnings in dollars.

The waves caused by the potential for a Greek exit from the Eurozone amply demonstrate Europe has some considerable sway on UK stock prices too.

Chinese demand has in the past driven up the price of materials sold by Footsie stalwarts like Rio Tinto and BP, and now presents opportunities for companies like Pearson and Rolls-Royce.

Saudi Arabia and Opec’s decision to maintain oil production has slashed the cost of petrol and delivered a shot in the arm for UK consumers, and the businesses dependent on their spending habits. Meanwhile it has dented the profitability of the oil and gas companies which make up such a large part of the UK index.

This all goes to show that the UK stock market is actually a reflection of a truly global trading community, which is not under the control of politicians in any one country.

So don’t worry, whichever party wins the General Election, its leaders have only a limited capacity to screw it up.