There are three key reasons why the equity markets probably don’t care much.
1. Whoever wins, the independence of the Bank of England’s Monetary Policy Committee looks secure. Therefore the key driver of interest rate policy is unlikely to be affected by the vote.
2. About ¾ of the earnings of FTSE 100 companies are now made overseas, so domestic political developments are only likely to be felt at the lower end of the markets, which of course account for a relatively small proportion of its total market capitalisation.
3. Despite the political scaremongering, only two elections since 1970 have had a significant impact on the stock market. The 1974 election (which led to a hung parliament) sent the UK stock market 22% lower in the month after the vote, and the 1992 election, which saw a surprise Conservative victory boosting the market by 14% in the first month. Neither had significant long term effects.
The fixed income markets, particularly Government bonds, could be a completely different matter, hypnotised as they are by the public finances. All parties agree on the need to reduce the deficit but there is less agreement on balance between spending cuts, tax rises, or the speed of response required. The Conservatives favour rapid spending cuts, although they would probably also implement some tax rises, probably VAT, as well. Labour has said it believes spending cuts should wait until the recovery is more secure.
The bond markets would probably prefer a decisive Conservative win, because this would make it more likely that the UK’s AAA credit rating would be protected. Their proposed faster action and a focus on spending cuts would probably ensure that interest rates were able to stay lower for longer too.
Although Labour’s response would be slower, the effect may not be too drastic as they have a medium term commitment to reducing the deficit. Even a hung parliament would not necessarily be a disaster because the Lib Dems attitude to deficit reduction is pretty robust too.
However, if the market starts to suspect that the deficit is not under control, it can move aggressively to punish weak actions, or a weak Government. If that one starts to roll, the momentum may be difficult to stop.