May 12, 2015

Sussex & the City: Britain’s election should give businesses a short-term boost

by David Pegler

in Research

A much better than expected showing by the Conservative Party has eased the jitters of investors who feared an inconclusive result. But the surprisingly decisive outcome also creates medium-term headaches.

A Labour administration would have left UK banks looking at a tax on their bonuses and driven pre-existing competition probes and proposals to ring-fence retail banking arms more aggressively. Greater flexibility on what to do with earnings should enable Lloyds Banking Group and Royal Bank of Scotland to restore dividends that have been dormant since 2008, while HSBC and Standard Chartered may now find reasons to re-domicile to the Far East less pressing.

Utilities and defence stocks also look like net winners from a Tory administration. Since Labour announced in 2013 that it would freeze energy prices for 20 months post-election, shares in UK power suppliers SSE and Centrica have underperformed European peers by 20 percent and 50 percent respectively. Conservative energy policy, and the party’s stance on the future of Britain’s Trident nuclear submarine capability, appear more moderate.

Elsewhere, bookmakers had also been targeted by Mr Miliband, who outlined plans to introduce a levy on all sports betting. Housebuilders will be relieved as fears over a mansion tax being introduced have been removed. Rail and bus companies were also concerned they would face increased state presence under Labour.

The big caveat is Europe and, to a lesser degree, Scotland. Cameron’s showing means his pledge to hold a referendum on membership of the European Union by 2017 should now happen. The Scottish National Party’s stunning gains in Scotland could also mean a second independence referendum is on the agenda.

If the UK moves decisively towards a European Union exit, questions will be raised about London’s role as the key financial centre in the European time zone. Its significance won’t change overnight. But it might find itself having to work harder, or work differently, to sustain its position.