The traditional view is that the market worries over a Labour administration until it has won, then realises this means greater public expenditure. This time is different

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The Independent Online
What a fine old ship the UK economy is. She may be old but she's made from solid British oak. Unfortunately she does appear to be somewhat leaky and in spite of a drastic overhaul since 1979 her equipment doesn't seem to be quite as modern as her neighbours.

Discipline among the crew has been dramatically improved even if the differences between officers and crew are more sharply defined. There now, however, appears to be some difficulty ahead, as the crew in this democratically run ship is shortly to re-elect its captain and officers.

Until this is over she is likely to be less certain in her course and there may even be an amount of sail flapping. However, once the good governance of the vessel has been decided she will again be able to make her way and be possibly set on a new course.

The question, however, is whether she is in the right shape to compete with some of the more elegant looking continental galleons around her, and, come to that, if she wishes to sail with this squadron of other ships or make her own way?

As investors in this enterprise we need to be assured that the master is clear about what he is intending to achieve, and that our monies are safe with him and his crew.

Already we can see our markets being affected by the impending election. Whether it is based on logic or emotion, share prices will inevitably be influenced. Some, such as the water, electricity and power stocks will be really quite sensitive, but other privatisations have little need to be concerned.

I include companies like BAA and British Airways here. These companies have been in the private domain for such a period now and have created their own profile and culture, that most people can hardly remember them as being publicly owned at all.

The traditional view of an election, where a change of party is possible, is that the market worries over a Labour administration until it has won, and then realises that this means greater public expenditure, after which it forgets its concerns and recovers. This time the situation is different. Both "captains-elect" will have the same problem - money - or rather the shortage of it. The ability of either administration to increase public expenditure is severely restricted because the public sector borrowing requirement is still standing at just over 4 per cent of gross domestic product, and, if we are to conform to the Treaty of Maastricht then this has to reduce to 3 per cent.

So, whoever wins they may set a new course, but its likely to be very similar to the old one.

For the markets though, the main concern is uncertainty. We can already see this reflected in the UK market, when in the first quarter the FT- SE 100 under-performed after last year's exhaustive rise. And we only have to look at the US market to see that their rise has continued - so far.

They too have an election. Clinton maybe ahead in the polls but the only dead certainty is that certainty is dead. I feel it is very likely that with the increasing froth of their campaigning, their markets will also react to the uncertainty, and that at some stage in the summer a seemingly insignificant economic action or indicator will trigger a retrenchment of the Dow.

The uncertainty of the past week has, I believe, already undermined the market confidence and there will be further tremors to come. Inevitably when this occurs there will be a backwash which our market will have to ride, but we shouldn't be so badly effected as we have not risen so high.

So our summer is unlikely to see our ship lying placidly in a becalmed ocean. The political - both domestically, in Europe and further afield - will keep us all awake. I can't see the FT-SE 100 Index moving firmly with its own will in any direction, and it is far more likely to be tossed around by the vicissitudes of other external events.

In the short term we have the Railtrack privatisation to deal with and every chance of another one later in the summer in the form of British Energy.

The market is also full of rumours of corporate sharks behaving in a predatory manner looking for take-overs. When the monopolies and mergers commission report on the proposed takeovers by PowerGen and National Power of any remaining Regional Electricity companies appears, this is likely to have a knock-on effect and spark a new round of speculation.

Speculation over BT's negotiations (with Cable & Wireless) and the future of British Gas should help their shareholders see more value in their languishing share prices. Others like water stocks may also come back into the frame.

But why is all this speculation occurring now? The answer seems to lie in a feeling that if you don't do it now, it will be more difficult later. I am not completely convinced. I think it more likely that companies which have been building up reserves are looking for significant growth opportunities and acquisitions are an effective, if not necessarily easy way of going about it.

Interest rates are low and are likely to remain so for the time being - although the next move could be up if the retail recovery shows any sign of quickening. So what should we do with our money in this naval enterprise? In my view, if you are already invested then obey sound investment rules - if you are showing a good profit, then bank it; if you are showing a loss then cut it, unless you believe there is a special factor.

In the meantime, our market will probably sway to and fro until the question of captaincy and officers has been decided. So if you are in an investment skiff be prepared for the summer back wash from the US and do watch out for the sharks.

Justin Urquhart Stewart is business planning director, Barclays stockbrokers limited

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