City of London reconciled to UK Labour third term

Election victories by Britain's Labour Party were once viewed with horror by the City of London - enough to sink the pound and send the stock market sliding.

Not anymore. If Prime Minister Tony Blair leads Labour to a decisive third consecutive win next week, as almost all the polls suggest, it will barely register with financial markets.

A substantial Labour win on May 5 is fully factored into prices and eight years of steady economic growth under Mr Blair and his finance minister, Gordon Brown, have neutralised much of the opposition to Labour, once feared by the City of London as the enemy of profit and bringer of punitive taxation.

Although business leaders think Labour is more likely to raise taxes and impose new regulations than the opposition Conservatives (Tories), traditionally the party of business, the Blair government is now a known quantity and many of its policies are almost identical to those of its main opponents.

"Labour securing a clear majority on May 5 looks like a racing certainty and 'event risk' looks negligible," said Ian Richards, European equities strategist at ABN AMRO.

"The Conservatives regaining enough ground to limit Labour to a minority government looks highly unlikely," he said in a research note to clients this week, adding: "Such an outcome constitutes the worst-case scenario for the financial markets."

Richard Hunter, head of UK equities at private client stockbroker Hargreaves Lansdown, said financial markets were always most likely to be unsettled by surprises.

"Most investors seem convinced that another Labour term is inevitable, so a Tory win would most likely cause some sort of upset to the market," he told Reuters.

A Reuters poll of currency strategists this month showed 26 out of 38 expected the pound to be broadly unchanged against the dollar, while 30 forecast no decisive move against the euro, if Labour wins with a reduced majority, as most analysts expect.

The view of Labour has changed radically in the last decade. Of the 14 general elections between World War II and the mid-1990s, the Conservatives won eight while Labour won six. After seven of the Conservative victories, the UK stock market rose. After five of the Labour victories, it fell.

That pattern ended with the Labour landslide in May 1997, after a concerted effort by Mr Blair and Mr Brown to wine and dine the City in a campaign dubbed the 'prawn cocktail offensive'.

In the years preceding Mr Blair's election, Labour dumped many of its socialist policies, including its long-term commitment to nationalisation, and built an image of economic competence.

Reversing the trend, the UK stock market rose after the 1997 election and again as Mr Blair was re-elected in June 2001.

One of Mr Brown's first acts as finance minister was to make the Bank of England, and thus much of monetary policy, independent, a move that strengthened Labour's pro-business credentials.

Mr Blair and Mr Brown have continued to woo the City, speaking regularly to businesses and vowing to encourage competition and to protect London's position as a top global financial centre.

Financial services represented more than five per cent of UK economic output, or over £52 billion, in 2003, according to the most recent industry figures.

This week, a group of 63 top managers wrote an open letter to the Financial Times to applaud what they said was the "unprecedented" economic stability under Labour.

The Conservatives hit back with backing from 67 business leaders, and most evidence suggests that in the privacy of the polling station, bankers, stockbrokers and fund managers are much more likely to vote Conservative than Labour.

A recent poll of commercial lawyers found 40 per cent expected to vote Tory, while only 14 per cent would vote Labour.

Many business people worry that Britain is becoming less competitive and that the years of labour growth may be ending.

Almost all economists expect Labour to raise taxes during its third term but they say that an incoming Conservative administration would probably also have to bolster its finances.

"Whoever comes into power, they are probably going to have to raise taxes reasonably sharply," said Haydn Davies, chief economist at Barclays Global Investors.

"The Tories are more likely to raise taxes on the personal sector," he said. "Labour are more likely to raise taxes more sharply on the corporate sector." Paul Marshall, a co-founder of Marshall Wace, one of the UK's biggest hedge funds and a high-profile supporter of Britain's third party, the Liberal Democrats, believes the City is not worried about the outcome of the election.

"The battle over free markets has been won and that is the main issue for the City," he said. "There is no clear blue water that separates the parties in their policy over the City."