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UK election and how equities perform – Goldman

0 – The U.K. has to hold a general election by January next year at the latest, and Goldman Sachs (NYSE:GS) looks at the potential impact on U.K. equities as a result.

Current polls put the opposition Labour Party considerably in the lead, a view backed up back up by last week’s local elections which showed heavy losses for the ruling Conservative Party.

“While it is not unusual for the incumbent government to lose heavily in local and mid-term elections, these losses come after similar large losses in the previous council elections,” analysts at Goldman Sachs said, in a note dated May 9.

Acknowledging that elections have their individual histories, political circumstances and economic backdrops, the bank noted that, on average, the FTSE 350 fell in the run-up to and directly after a Labour win, and rose slightly with a Conservative victory. 

However, the differences are not large, and there has been a considerable spread of outcomes. Moreover, the rise post a Conservative victory was given back relatively quickly.

“Taking entire government terms since 1966 and comparing Labour-led and Conservative-led administrations, we find that Conservative administrations have coincided with higher FTSE 350 returns. However, this does not hold up once we look at performance relative to world equities and in common currency terms,” Goldman added.

With this in mind, the analysts see the general election as less important than the cyclical backdrop, especially given that whichever party wins will face the same tight fiscal constraints.

Aside from the election, “we remain positive on U.K. equities, as large caps are benefiting from high share buybacks/dividends and continued global cyclical improvement,” Goldman said.

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The bank has lifted its 3-month FTSE 100 price target to 8400, from 7800, its 6-month target to 8600, from 8000, and its 12-month target to 8800, from 8200 – resulting in a total return of 9% over 12 months.

At 05:40 ET (09:40 GMT), the FTSE 100 rose 0.1% to 8357.77, trading just below its recently hit record high.

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