Financial Preview: 2015 UK General Election

As has become even more apparent following an Autumn Statement targeted directly at the psyche of voters in the ballot box next May, there will be a UK general election in 2015.

And as with any election, uncertainty and volatility can creep into the markets; this election looks set to be no different. In fact, the lack of clear favourite in this upcoming election has the potential to cause more volatility than normal, with upstarts UKIP causing a disruption to the usual political order in a way reminiscent of, but more extreme than, the Liberal Democrats at the last election.

George Osborne’s Autumn Statement yesterday can be seen as the first shots fired in the election race, as it laid the groundwork for some of the potential battlegrounds in the run up to next May. The FTSE was not best pleased, as some unexpected announcements obscured worrying news for the UK economy.

The biggest surprise in the statement was the changes to stamp duty, changes that will benefit the majority of homebuyers. Anyone paying up to £937,000 for a house will save an average of £4,500; however, those paying over this price will face a heftier charge, in what many are calling Osborne’s answer to the proposed ‘mansion tax’.

Whilst this news is great for (most) buyers, housing-sector companies have had a mixed reaction. Foxtons and Shaftesbury, in fear of these charges to higher-paying clients, saw share prices drop in the aftermath of the announcement. Whilst only 2% of buyers fall into this post-£937,000 bracket, the increased charge on these more expensive properties have a knock on effect for higher-end developers like The Berkeley Holdings Group. This stamp duty move has also been criticised as vote-bait that removes £800 million in tax revenue from the economy at a time when the UK cannot afford the loss.



There was also unwelcome news for the banking sector, as Osborne announced that banks are to pay £4 billion in taxes over the next five years, to prevent them from further offsetting taxes against carried-forward losses from the financial crisis. Britain’s big banking five, Lloyds Banking Group, HSBC, Barclays, Royal Bank of Scotland and Standard Chartered have a total of £17 billion in tax-deferred loans on their books, so this news will hit them hard. Whilst they have stabilised this Thursday, the immediate reaction by banking stocks saw shares fall across many of these banks, as they also smarted from the previously announced £1.2 billion in forex-rigging fines.

There was also the announcement of the diverted profits tax, a tax of 25% on multinational companies that shift profits out of the UK. The claim is that this will raise £1 billion over the next 5 years; however, many have questioned whether such a law could be thoroughly and effectively implemented without co-operation from the international communities. If actually applied, the increase in tax for notoriously tax-evading giants like Google and Amazon may cause them to think twice about operations based in the UK.

There was good news for airlines, which have already been soaring recently due to the plummeting price of oil. A freeze of fuel duty (a much needed positive for the UK’s energy companies) and the abolishment of air passenger duty children under 16 within the next two years meant that stocks like Easyjet to rocket up the charts. This duel announcement should continue to see airlines in good favour, as long as oil doesn’t undergo an unexpected rally.



Whilst the Autumn Statement provided plenty to chew on for various sectors of the FTSE, the most worrying news came in the figures surrounding the UK economy itself. Despite Osborne and the OBR forecasting that the UK would be £4 billion in surplus by 2018-19, borrowing grew this year by around £13 billion more than expected to £91.3 billion in 2014-15. This will be followed by £76.6 billion in 2015-16, slowly shrinking to the aforementioned surplus in 5 years.

However, this government has regularly missed its targets, as shown by this year’s increase in borrowing, and this crawl into an economic surplus is at odds with many of the figures revealed on Wednesday. Whilst UK GDP growth reaching 3% this year has been much celebrated, this is set to fall year on year from 2015 onwards. This comes alongside news that inflation for 2014 will be 1.5%, to fall in 2015 to 1.2%. This is quite a bit below the 2.0% inflation target set by the Bank of England, and would appear to put the proposed reduction in borrowing in jeopardy. The weak forecast figures for the future of UK economic growth and prosperity does not bode well for the next year or two for the FTSE. It is very sensitive to these numbers, so the potential consistent regression in economic data, alongside general pre-election instability, may cause volatility on the UK index.

The FTSE is not alone in a potentially volatile future. As the Scottish referendum showed, the British pound suffers under uncertainty; and nothing is more uncertain than this upcoming election. Unlike the last general election, where a Tory minority could more easily be priced into the markets, the 2015 election has no clear outcome at the moment, and may not until the final vote has been counted. The ambiguity arising from this situation should cause a sharp reaction to the election once the results have been announced, and the pound will be under pressure in the face of such uncertainty.

However, the UK doesn’t exist in a vacuum. The continued strength of the USA, alongside the ever-increasing likelihood of Eurozone stimulus from the ECB could help steady the FTSE in the face of upcoming choppy waters. The Eurozone situation especially could be a big help, as the FTSE all too often recently has been weighed down by disappointing European data, and underperforming Eurozone indices. Aid will also come from the potential of a weak euro. If quantitative easing moves forward in the Eurozone, the euro will most likely be negatively affected; this could provide some much needed help for the pound as pre-election instability looms on the horizon.