How investors will fare in the battle of the ballot box

James Daley examines the latest predictions being made by financial experts

With the 5 May general election fast approaching, the financial services industry has been cooking up theories about how a change in government might affect your investments.

With the 5 May general election fast approaching, the financial services industry has been cooking up theories about how a change in government might affect your investments.

Fidelity Investments, for example, reminds us this week that stock markets have typically fallen in the days after post-war Labour Party victories. While in the wake of a Tory triumph, they have tended to rise.

In fact, since 1945, after every election (with the exception of 1997) where Labour has ousted a Tory government, the markets have sustained a sizeable drop. And in February 1974, where Labour's victory went against expectations, the market nose-dived more than 7 per cent.

In contrast, surprise victories by the Conservatives in 1970 and 1992, sent markets soaring by 5.1 and 6.2 per cent respectively.

"The figures show that markets react most strongly to the unexpected," says John Ross, Fidelity's senior strategist. "The biggest movements in share prices are when the pollsters get it wrong, or the consensus view is faulty.

"A Conservative victory would be the surprise this time around. In that event, my guess is that the market would rise. If Labour return to power, nothing changes." Halifax, meanwhile, points out in new research published today that the Tories have also - on average - presided over bigger rises in house prices than Labour. Edward Heath holds the record increase for one term, with prices rising 120 per cent during his four years in office.

However, the figures also show that the only nominal annual falls in house prices in the past 50 years also came under a Tory administration - in 1990, 1991, 1992 and 1993.

But with the Labour Party no longer associated with over-extravagant public spending and exorbitant taxes, markets are much more neutral to a change in government than they once were. Although New Labour has landed companies with a heavier tax burden than they had eight years ago, it is unlikely that the Conservatives would go to any great lengths to undo this regime if they were elected.

Furthermore, Gordon Brown's cast-iron record as Chancellor has shown that Labour governments are no longer synonymous with economic mis-management. But while there are no longer as many differences between the two main parties' economic and corporate policies, the election result will still have direct and very real implications for several industries and certain stocks.

Eric Moore, a senior investment manager for Gartmore, says that he believes a Labour government is more likely to impose new windfall taxes on certain industries, as it did with the utility sector in 1997. Oil companies are the most likely targets here after record increases in oil prices over the past year. However, windfall taxes on banks or even housebuilders have also been mooted.

"Whoever wins, income tax seems to be something that none of the main political parties can raise," says Moore. "So tax increases are going to have to come from other areas - and they may choose to take a swipe at corporate profits. I think Labour are the more likely party to do that."

Moore adds that there is also a chance that Labour would spend more on social housing and general infrastructure than the Conservatives, benefiting housebuilders such as Galliford Try, which specialises in that area of the housing market.

However, Patrick Evershed, the manager of New Star's Select Opportunities fund, says that he would advise investors to remain underweight in housebuilders, due to his doubts that Labour will be able to afford to put much more money into housing. He believes the pressure on the government purse will also then take its toll on consumer spending.

"The government deficit is already very large and yet again it is likely to turn out to be even larger than Gordon Brown is predicting," he says. "The present Chancellor has consistently underestimated his government's deficit. It is highly unlikely that he has been more conservative in his estimate in an election year.

If Labour were to win, it is therefore highly unlikely that government expenditure will rise above the present estimates. It is much more likely to be cut below present expectations and taxes are likely to rise, and this will put even more pressure on the depressed retail sector."

Evershed adds that he believes that the markets would see a significant rally in the event of a Conservative victory, while if there were a hung parliament the reverse could be true, due to political uncertainty.

Although the chances of a hung parliament remain relatively slim, such an outcome would bring a whole new set of issues into play, as the Liberal Democrats became a central force in government. Lib Dem plans to introduce a new 50 per cent band of income tax for those earning more than £100,000 would contribute to the slowdown in consumer spending that is already under way.

Richard Batley, the European economist for Schroders, believes that a change in government will not make any difference to this slowdown, with retailers almost certainly on course for a tougher time in the months ahead. However, he concedes that a coalition could accelerate the process. A Lib Dem coalition would also be likely to increase environmental taxes on companies, which could hit heavy industries such as Powergen.

The gaming industry could also be hit by a change in government. Although Labour has backed down over several proposals - such as creating dozens of "super casinos" - in its gaming bill, a Conservative government or Lib Dem coalition would be likely to go further and trample on the rest of its plans for liberalising the industry.

Finally, defence companies, such as BAE Systems, would benefit from a Conservative government - which pledges to spend £2.7bn more on the armed forces than Labour.

For most of us - who are investing for the medium to long-term, rather than trying to make a quick buck from short-term movements - the outcome of this election is unlikely to have a major effect on our investments. However, there may be some short-term gains to be made by guessing who will be in Number 10 on 6 May.

A Labour win?

* Markets: With a Labour victory expected, there is unlikely to be any change in the markets on the day after the election.

* Sectors that could be better off: A greater spend on housing would be likely to help prop up the housebuilders at a time when demand for residential property looks to be on the turn.

* Sectors that could be worse off: A windfall tax on oil companies is looking an increasingly likely prospect, with Labour the most likely party to introduce this. Banks could be another target, and are now certain to be stripped of the billions of unclaimed assets in dormant bank accounts.

A Tory win?

* Markets: History suggests that a surprise Conservative victory would send the markets sharply upwards on the day after the election.

* Sectors that could be better off: The Conservatives' commitment to spend £2.7bn more on the defence budget than Labour would provide a boost for this sector. Proposed tax cuts could help boost consumer spending and prop up the retail sector.

* Sectors that could be worse off: The Conservatives have been strongly opposed to many of the recent Labour proposals to liberalise the gaming industry.

Hung result?

* Markets: The prospective uncertainty of a hung parliament would probably send markets lower on the day after the election.

* Sectors that could be better off: With a greater focus on the environment than the other parties, the Liberal Democrats would provide more money for companies that develop sustainable energy sources.

* Sectors that could be worse off: If the Lib Dems were part of a coalition government, they would push to introduce 50 per cent income tax for those earning over £100,000. This could accelerate the slowdown in consumer spending, hitting the retail and service industries.

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