Close election battle will hurt stocks

The prospect of a close election outcome in Britain bodes ill for equities. Market historian David Schwartz notes that there have been five elections in the past 50 years when the winner's majority was under 20 seats.

The FTSE All-Share index slid in the six months before the vote on four occasions, with an average decline of 15%. Nine other polls produced a majority of at least 20 seats. Before eight of them, shares gained an average of 15% in the prior six months.

A key question this time is whether an improving economy could bolster Labour, making a hung parliament more likely. As joblessness falls, support for a government usually grows, says David Owen of Jefferies.

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But the link between a strong economy and high approval ratings is broken if the government loses a reputation for economic competence. The sheer scale of the latest fiscal crisis undermines this government's aura of competence. Unemployment is still well up on last year.

Gordon Brown would need "a much longer period of recovery" to rely on an election boost from the economy.