By Jens Erik Gould From The Financialist

In recent decades, Britain’s Conservative Party has made a habit of gaining momentum in the home stretch of an election campaign. So it was in the parliamentary elections earlier this month, although not even the most die-hard of Tory supporters expected such a resounding victory. On May 7, Prime Minister David Cameron’s party emerged from a tight race in the polls with an outright majority, and no need to form a coalition, as the Conservatives have done with the Liberal Democrats since 2010. The result will allow the Tories to press ahead with their agenda without being bogged down by the negotiations that occur under a minority government.

To gauge the potential market impact of the vote, Credit Suisse’s Private Banking and Wealth Management Division zeroed in on the aftermath of Britain’s 1992 election. That contest was the only other one in recent memory that produced an unexpected Tory majority. Stocks rallied in the 12 weeks after that election, and they are likely to do the same this time, says Michael O’Sullivan, the private bank’s Chief Investment Officer for the U.K. and Eastern Europe, Middle East and Africa.

In 1992, British equities performed 4.6 percent better than global equities in the 12 weeks following the election. British small caps performed particularly well over the same period, outperforming their global peers by some 17 percent. “U.K. equities have lagged Europe so far this year, and some of that gap should be made up now that that election uncertainty is removed,” O’Sullivan says. Banks, utilities, hotels and business services should do particularly well, he says.

As for fixed income, while Britain’s 2-year government bonds performed well after the 1992 vote, this time around Credit Suisse merely views the election as a “mild positive” for British sovereign bonds. While Credit Suisse favors being underweight on fixed income as a whole, O’Sullivan points out that for investors who want to take advantage of the recent selloff to “re-engage” with the asset class, gilts are cheap relative to other sovereign debt. Meanwhile, the pound has gained 3.4 percent against the dollar since May 7, and it could very well continue rising as the uncertainty of the election fades.

O’Sullivan also believes the majority Tory government will be positive for overall economic growth, and that the U.K. economy will continue to outperform that of its large European neighbors in 2015. Here again, history is a guide: In the years in which the Tories have won an election, economic growth has averaged 1.1 percentage points higher than the previous year. “There’s a sense of ‘keep calm and carry on,’” O’Sullivan says. “The U.K. economy tends to grow steadily in the aftermath of a Tory election victory.”

Alas, there are a few potential spoilers. O’Sullivan believes that the next move for the Scottish National Party will be to seek more independence rather than full independence. A possible future referendum on U.K. membership in the European Union also casts a shadow. Cameron has vowed to call a vote on a separation in 2017, and he drew attention to the subject again in his victory speech. Given the considerable political capital the prime minister gained from his party’s strong electoral performance, he should have no problem making good on his promise. While polls show that voters would likely choose to remain in the EU, a U.K. exit is nevertheless a risk. And as this election proved, pollsters don’t always get it right.

Photo of David Cameron courtesy of Frederic Legrand – COMEO / Shutterstock.com

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