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UK election risks heat up with four weeks to go

In four weeks we should know what the new UK government looks like, until then UK equities investors still have some decisions to make. 


Nominations for the UK general election officially shut at 4pm last night. 

The event was supposed to mark the start of the final countdown to voting day on 7 May.

From an investment perspective though, the clock has been ticking for some time.

Yet still, much to the annoyance of market participants, no one can call the result.

Polls have leaned towards Labour and Ed Miliband in recent days, but the Tories are virtually level. 

In these situations, it’s tempting to take a gamble on the outcome and its worth nothing that Betfair (LON:BET) is set to see record political betting volume heading into the election. 

Shares in the firm have already rocketed 42% to 2242p since the start of the year.

Other UK betting names to watch include William Hill (LON:WHM) and Paddy Power (LON:PWL)

Looking at sectors, investors will find it difficult to get clear view of what is exactly is going to happen, as Nicolas Ziegelasch, head of equity research at Killik admits.

“From an investment perspective, there’s a multitude of sectors at risk of becoming political punch bags,” he said.

Most City analysts, including Ziegelasch, agree that quoted energy companies and outsourcers face the strongest headwinds if Labour scrapes into power.

Shares in Centrica (LON:CNA) and SSE (LON:SSE) are down 6% and 4.5% respectively since the start of the year, even as the FTSE 100 index reached record highs.

That’s largely due to investors pricing in Ed Miliband’s policies, which include a 10% energy retail price cut and handing regulator, Ofgem, greater powers.

There’s also an overwhelming market view, one shared by Barley too, that outsourcers would suffer more under a Labour government. 

Last month, the party said it would award fewer NHS contracts and introduce a “profit cap” for private sector contractors.

That would be damaging to Serco (LON:SRP), Capita (LON:CPI), G4S (LON:GFS) and Babcock (LON:BAB).

When it comes to housing stocks, any pledges regarding measures to increase homebuilding could prove fruitful for UK homebuilders including Persimmon (LON:PSN), Barratt Developments (LON:BDEV), Berkeley Group (LON:BKG), Bovis (LON:BVS) and Redrow (LON:RDW).

Today, broker Jefferies sent out over a dozen upgrades on housing related stocks, raising seven names from Hold to Buy and three from Underperform to Hold. 

“The latest data points to a stronger pre-election housing market than we had anticipated,” it said. 

Meanwhile, David Cameron’s promise of an EU referendum poses particular problems for others, particularly financials.

“Typically, UK equity markets have reacted more positively to the Conservative victory than to the Labour one,” explains JP Morgan equity strategist, Mislav Matejka.

“This time around though, the prospect of David Cameron pressing ahead with plans for a referendum on EU membership, could dampen any meaningful relief rally.”

Matejka reckons shares in London-listed banks would come under pressure as London’s position as a major global financial hub would be weakened.

Big businesses were reluctant to give their views on the Scottish referendum until the polls tightened at the last minute.

But HSBC (LON:HSBA) analysts have started early on Europe.

Last month, researchers at the lender said a “Brexit” would be a bad move as the UK would miss out on more open markets.

 “Expect markets to be roiled if a ‘Brexit’ becomes a real possibility,” fund house BlackRock warned recently.

The world’s largest fund manager also warned that markets are currently too complacent over the general election. 

With four weeks to go, things are changing. 

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Price: 11990 GBX

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