The UK will vote in a general election by January 2025 at the latest, with autumn seen as the most likely date. RBC analyzed historical performance of UK markets as well as key sub-sectors in recent elections and has included RBC Analyst views on the potential impact of the coming election on their sector.
FTSE 250 shines in election run-up
The past eight general election cycles have demonstrated that market performance around the time of UK election is generally volatile.
The FTSE 250 has generated positive performance in 7 of 8 UK elections during the preceding 6-month period. During the four most recent elections, the FTSE 250 delivered an average return of almost 11% (on a 6-month view).
The weakest FTSE 250 performance has historically occurred during the preceding 1-month period. This is typically followed by recovery in the proceeding 1-week and 1-month periods.
In contrast, the FTSE 100 does not appear to have the same positive performance in the 6 months prior to an election (with only 5 of 8 historical UK elections showing positive performance). This may be reflective of the relatively higher exposure of FTSE 250 companies to the UK economy vs the FTSE 100.
Like for the FTSE 250, the FTSE 100 has historically performed poorly in the preceding month, followed by a recovery in the subsequent 1-week and 1-month trading periods. This volatility is likely reflective of investor uncertainty in lead up to elections, with a degree of recovery after the results are finalized and policy decisions become clearer.
“During the four most recent elections, the FTSE 250 delivered an average return of almost 11%.”
Peter Dawkins, European Equity Research Analyst
History suggests positive performance for Industrials, negative for Energy
Analysis of FTSE 350 sub-sectors reveals strong outperformance in the six months leading up to elections. Seven of the nine sub-sectors analyzed outperformed the FTSE 350.
In the weeks and months after an election, the strongest average industry outperformers have historically been real estate, utilities, and industrial goods and services. Consumer staples and basic resources tend to gain more momentum at the three-month and six-month mark.
The FTSE 350 Energy Index is an exception. Its average performance across five elections has never generated outperformance relative to the FTSE 350 in any of the time periods we analyzed.
Windfall taxes to remain in focus
The election’s effect on GDP, confidence and investment will filter through to every sector, but some are likely to experience a more specific and significant impact.
For the integrated energy companies, potential policy changes to the windfall tax loom large. The Conservative government has already extended the ‘energy profits levy’ by a year. However, the Labour opposition has suggested it would close various loopholes if elected.
It is expected that any further Energy policy changes may be detrimental to investment and sentiment in the sector as it would create further uncertainty and likely weakened economics for oil and gas producers, while it could also have ramifications for energy security and job creation in the sector.
The election could also affect the green hydrogen and green ammonia space. Relevant public policies include direct support commitment – through government auctions, for example – as well as tightening of emissions regulations.
“For the integrated energy companies, potential policy changes to the windfall tax loom large.”
Biraj Borkhataria, Managing Director, Deputy Head of European Research
Housing, retail, banks anticipate a boost
We expect housing policy to feature prominently in this election, potentially triggering a catalyst for homebuilders and building materials distributors.
Supply side restraints are a key factor currently holding back the re-rating of shares for housebuilders. Planning reform could include reinstating mandatory housing targets, increasing funds for planning departments, and mandatory review of the green belt. Either party may also promise demand-side stimulus to support first-time homebuyers.
In General Retail, we see spending on bigger ticket items as more likely to be affected by election uncertainty than spending on less discretionary purchases, but expect that a Labour victory could be supportive for housebuilding and energy efficiency projects.
A reintroduction of the VAT Retail Export Scheme, abolished in 2021, would support luxury brands and the UK tourism industry, by enabling non-EU visitors to make 20% savings on purchases.
For UK Banks, the anticipated change of government to a centrist Labour administration would make this election most comparable to 1997, when UK banks significantly outperformed the market in the nine months leading up to the election: large banks by 19%, and small and mid-caps by 32%.
“We expect housing policy to feature prominently in this election, potentially triggering a catalyst for homebuilders and building materials distributors.”
Anthony Codling, Head of European Housing and Building Materials Research
