British blue-chip stocks face uphill struggle

Better late than never. Britain’s benchmark FTSE 100 index eclipsed 7,000 for the first time, and thus finally seemed to be breaking out of a 15-year trading range. But it may struggle to make much more progress this year.

Yes, the gradual global recovery, and the likelihood that interest rates will rise later rather than sooner, bode well for all assets. But UK markets face a key source of uncertainty in the general election on 7 May.

The election “could have a bigger impact on asset prices than any in living memory”, reckons Fidelity’s Tom Stevenson in The Sunday Telegraph. Not only does a hung parliament look likely, but either main party will have trouble putting together a coalition.

The Lib Dems are set to get far fewer seats this time, which means that any coalition with them might have to involve smaller parties as well. A Labour-SNP coalition could cause constitutional upheaval.

A Labour victory could rattle utilities and banks, while a referendum on our EU membership under a Tory-led administration would cause jitters over our future relationship with our top trading partner.

Sterling and equities thus look exposed. While a decline in sterling would bolster the earnings outlook – FTSE firms make most of their sales abroad – it could also make the UK market less appealing to foreign investors.

It hardly helps that the FTSE is unusually skewed towards weak commodities. So despite the reasonable valuation of 16 times this year’s earnings and near-4% yield, it’s hard to get too excited about UK blue chips.

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