Matthew Lynn: Election means it's decision time for investors too

Gordon Brown. Photo / AP

Opinion

The posters are up. The manifestos are written. And the candidates are chosen. The British Prime Minister, Gordon Brown, announced on Tuesday the election will be held on May 6.

Should investors be buying into Britain ahead of that?

The historical record says they should. Polls show the Conservative Party is the likely winner, and shares have always done far better under the Tories than under the Labour Party. Likewise, sterling usually benefits from a change of government. Rising share prices and an appreciating currency are a great combination, particularly for foreign investors.

Better throw away the charts and history books. Even though "it's different this time" is the most dangerous phrase in the financial lexicon, on this occasion the past probably is a poor guide to what is likely to happen. There is still too much doubt about the result of the election. And even if there is a change of government, it doesn't look as if the UK is ready for the kind of tough medicine it needs to get its economy back on track. A weak government, with little public support for its policies, would be no improvement at all.

There is no disputing the fact that Conservative governments have been better for anyone owning British equities. According to a paper by John Littlewood, published by the London-based Centre for Policy Studies, an economic-policy think tank, shares have almost always fared worse under a Labour government.

Under the 1945-51 Labour administration, equities lost 8 per cent, adjusted for inflation. Under Harold Wilson from 1964-70 they dropped 13 per cent, and under the 1974-79 government, they declined 11 per cent. Tony Blair and Brown have proven even worse for investors. Littlewood calculates the losses on UK stocks at 26 per cent from 1997 to 2009, again in real terms. Of course, British equities have recovered since then, along with stock markets around the world. But it is still a pretty dismal performance.

By contrast, equities have almost always done well under the Conservatives. Under Margaret Thatcher and then John Major, between 1979 and 1997, equities gained 166 per cent after inflation, while under the Tory administration that ran from 1951 to 1964, they gained 74 per cent.

That's not all. You would expect to see some strengthening of sterling from its recent lows if there is a new government. The pound rallied after Thatcher became Prime Minister in 1979, and rose briefly against the US dollar after Blair took office in 1997. The foreign-exchange markets seem to value leadership.

So the historical evidence is conclusive. This is the moment to buy into the UK. There are just two big problems.

First, we have no way of knowing how conclusive the election result will be. A YouGov Plc poll for the Sunday Times put David Cameron's Conservative Party at 39 per cent of the vote, with Labour at 29 per cent and the Liberal Democrats at 20 per cent.

A hung Parliament would be the worst of all possible worlds. A coalition or a minority government would be weak and divided. It would be constantly monitoring the polls, waiting for the right moment to call a fresh election. There would be no effort to get the deficit - now about 12 per cent of gross domestic product - under control. Britain would look like Greece minus the olive groves and sunshine: a spendthrift, indebted nation, without a clue how to finance itself. The bond markets would be swift to punish it just as severely as they have the Greeks.

A Conservative government with a clear majority might not be much better. It hasn't campaigned seeking a mandate for reform, and can't complain if it doesn't get one. The UK doesn't just need to rein in public spending to control the deficit: it needs savage cuts on top of that to cut taxes and stimulate a recovery. The opposition isn't spelling out how hard the journey is going to be. So don't be surprised if a Conservative government runs into massive opposition once it becomes clear how tough it is going to get.

Britain will be attractive again one day. Its labour markets are far more flexible than they were in the 1970s, it has plenty of entrepreneurs, a skilled workforce, and formidable intellectual capital. With the right policies, it could bounce back relatively quickly: it doesn't need the kind of massive overhaul it required in the 1980s.

But it needs to face up to a period of sharp austerity. It doesn't look like the country realises that yet.

And until it does, it won't make much difference which party is in government and you don't want to own any British assets.

- BLOOMBERG