Conservative or Labour? What the stock market is likely to do in the wake of July’s General Election

“The headline data suggests that a Labour government, and a change in the identity of the incumbent in 10 Downing Street, need not be seen as an inherently bad thing.”

Received wisdom points towards a Conservative win in any general election being the best outcome for the stock market and UK shares, but this may not always be the case.

On average, the FTSE All-Share Index, encompassing some 600 stocks, has recorded a double-digit percentage gain in the first year after an election which saw one prime minister ejected from office and another, new one ushered in. There are also greater average gains when a government changes relative to when it remains the same after a general election.

Investment firm AJ Bell analysed market data relating to the 16 general elections that have taken place since the inception of the FTSE All-Share in 1962 ahead of the one called for this summer.

Market traders will be keeping a very close eye on how equities perform in the wake of July 4's general election outcome.

The firm’s investment director, Russ Mould, said the study showed that the UK stock market was “by no means frightened of a change in government and it may even welcome it”.

He said: “Labour governments can also point to healthy average stock market gains during the terms of their five prime ministers during the 62-year era of the FTSE All-Share. That said, the UK equity market has done better since 1962, on average, when the Conservatives have triumphed at the ballot box.”

But he added: “The prospect of a government spearheaded by Sir Keir Starmer and Rachel Reeves is unlikely to spark the sort of fear that would have been inspired by an administration whose driving forces were Jeremy Corbyn and John McDonnell.

“Moreover, the current Conservative government, whose tenure effectively dates back to 2010 and covers a flurry of five prime ministers, could be seen as having taken an increasingly interventionist approach to the economy, given such initiatives as sugar taxes, Help to Buy, energy price caps, windfall taxes on North Sea oil producers, 2021’s National Security and Investment Act and proposals for changes to the 2005 Gambling Act under the recent review.

“The headline data suggests that a Labour government, and a change in the identity of the incumbent in 10 Downing Street, need not be seen as an inherently bad thing.”

Mould also noted that the size of a government’s majority seems to be a “matter of indifference” to stock market investors.

He added: “Margaret Thatcher’s crushing 1983 general election win helped to set the tone for her second term and that period yielded the best nominal (and real, post-inflation) returns from the FTSE All-Share from any post-1962 administration. However, Tony Blair’s second-term majority was even bigger, and that period yielded negative returns for investors in UK equities, using the FTSE All-Share as a benchmark.”

Schroders fund manager Graham Ashby said: “Equity investing always carries risks and trying to time shifts in markets is far from being an exact science, very much like politics. That said, sentiment towards UK equities is at a very low ebb, and we’re wondering if a change of UK government might coincide with a turning of the tide for sentiment. With sentiment towards UK equities so low, contrarian investors might argue things can only get better.”

Meanwhile, the upcoming election could affect plans for a retail share offer of the UK government’s remaining stake in Royal Bank of Scotland parent NatWest Group. The current administration has committed to exiting the stake, which stands at about 27%, by 2025/26, but that timetable could now change.

Shore Capital banking analyst Gary Greenwood said: “In the seemingly unlikely event that the Conservative Party is re-elected, we would expect a rapid thaw and for such plans to be swiftly reintroduced. However, should the Labour Party come to power, as widely anticipated, then such plans are likely to be revisited and possibly amended. That said, whoever wins the election will still be looking to reduce and ultimately exit the government’s stake in NatWest, in our view, so the sell down is still likely to continue in one form or another.”

Capital return from FTSE All-Share:

Change in government: 1 year before poll 6%, 1 year after poll 12.8%, Term of government 47.9%

Incumbent wins: 1 year before poll 11.8%, 1 year after poll 0.9%, Term of government 31.1%

Source: LSEG Datastream data. 1964/66 to 1970 Wilson governments and 1974/74 to 1979 Wilson/Callaghan governments counted as one term. 2019 Conservative government to 22 May 2024