History shows UK markets shrug off elections

By Mike Dolan LONDON (Reuters) - Three weeks ahead of an election that seems likely to produce no clear winner and trigger a bout of political uncertainty, the temptation for foreign investors to cut and run from British assets should be intense. Yet as strategists and investment managers pore over the parliamentary permutations that might follow the May 7 poll, financial markets have barely flinched. And judging by market behaviour around the seven British elections from 1983 onwards, that's not as surprising as it might seem. Opinion polls and betting markets point towards another hung parliament, even more fractured than in 2010, when a rare coalition government resulted. That raises the prospect of weeks of political horse-trading, a shaky minority government and even a repeat election. Some investors fear a Conservative-led administration will honour a pledge to call a referendum on European Union membership in 2017. Others dread a left-wing pact between Labour and Scottish nationalists that could slow budget deficit cuts, increase regulation and hasten a re-run of last year's independence referendum in Scotland. As Deutsche Bank economist George Buckley says: "There are few 'good' outcomes for the financial markets." So watching top UK stocks <.FTSE> hit record highs, up almost 8 percent so far this year, is a little puzzling. Britain's 10-year borrowing costs also remain below 2 percent and within half a point of January's record lows. Even sterling, left especially vulnerable by the need for foreign financing to plug the UK's huge current account gap, remains relatively unruffled. Options markets have seen short-term hedging against significant sterling swings around polling and beyond, but the pound's trade-weighted value <=GBP> has been stable for almost two months and is up more than 1 percent this year. RUDE AWAKENING? So are these markets set for a rude awakening? Market behaviour three months either side of each British election held from 1983 shows some good reason for the calm. http://link.reuters.com/fen54w For FTSE 100 stocks, only one of those periods showed a net loss of more than 2 percent and that was in 2001, when Labour and Prime Minister Tony Blair easily won a second term. And rather than politics, the reason for the outsize FTSE drop that year was the final throes of the dot.com stock market crash that had swept around the world since mid-2000 Losses on 10-year gilts have only once topped 2 percent, in 1987, another poll in which the incumbent -- then the Conservatives -- swept to another term. Again, that was more to do with a tightening of global interest rates to control a brewing inflationary boom. Trade-weighted sterling meanwhile did not lose more than a net 3.1 percent in any of the post-election periods examined. A different cut of historical data shows the full-year performance of UK stocks and gilts has been positive in all six election years, even when adjusted for sterling moves. "How many elections have actually had a material impact on the economy or financial markets over the past 30 or 40 years? When one looks at the charts, the answer is very few," said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh. Of course this year might be different. Options markets are braced for sterling moves of up to 13 percent against the dollar over the next month. Gloomier forecasters have warned for some time that Britain's yawning balance of payments and budget gaps, could result in a sterling crisis. With Britain "up to its eyeballs in macro manure", Societe Generale's perennially bearish strategist Albert Edwards says the election could be the trigger to set this off. This dependence on foreign cash is why many see the risk of an EU exit linked with a Conservative-led win as a bigger market threat than any left-of-centre political constellation. But UK assets have broadly shrugged off elections over 30 years and climbed regardless during an extraordinary period for world growth and savings. Inflation-adjusted returns on both the FTSE and gilts have increased tenfold since 1983. Those moves stemmed from the wave of radical free-market reforms, deregulation, privatisation and copper-fastened property rights ushered in by Conservative premier Margaret Thatcher in the 1980s -- reforms few political contenders have even threatened to roll back since. The flipside has been rising wealth inequality between the small percentage of mega-rich asset holders and the rest of the wage-earning population, a key political issue this year. Neither trend is going to be challenged by this election. And that's why AXA Investment Managers' David Page insists the 'least negative' market and investment outcomes could, counter intuitively, be associated with minority governments. "Minority governments could be held closer to the political centre-ground through necessity of cross-party support for policy," he argues. "Hence they would be closer to a continuation of global capitalist policies that have provided a bedrock for financial markets." (This version of the story was refiled to make clear that the graphic includes 1983 election) (Additional reporting by Franceso Canepa; Graphic by Vincent Flasseur; Editing by Catherine Evans)