Listen to this article
When the UK's stock market strategists issued their predictions for 2005 at the turn of the year, very few suggested that political risk was something that investors should worry about. With a general election probably only four months away, that is rather surprising.
It is, of course, a testimony to the strength of Britain's economic performance under Labour that markets are perfectly relaxed about the prospect of a third Labour term. It was not always so. In the old days, investors had a clear preference for Tory governments, with their pro-business agenda and readiness to cut taxes.
According to David Schwartz, the stock market historian, stock markets have risen in the four-month run-up to nine out of the past 15 elections and fallen in the remaining six. On the five occasions when the Tories ended up with a big majority, the market rose every time in the preceding four months.
It fell, however, in the run-up to big Labour majorities on three occasions out of four. The exception was 1997 when national disillusion with the Tory party was so great that a Labour victory was already widely discounted and welcomed.
It is not that the market has done particularly well under Labour. The FTSE 100 index stood at 4,445 on May 1 1997, the day that Labour returned from its 18-year wilderness in opposition. At Friday's close of 4,803, more than 7½ years later, the index was only 8.1 per cent higher. Part of the blame for the poor performance must lie with Gordon Brown after his raid on pension funds and decision to scrap the dividend tax credit.
But there is no doubt that the market has confidence in the chancellor's handling of the economy, given that the UK has been growing without interruption for more than a decade and has comfortably outperformed its larger European neighbours. The chancellor's credentials have been strengthened by his decision to hand control over monetary policy to the Bank of England.
The economy now has a stability that means the outcome of the election is unlikely to have a big influence on growth or inflation. Nor, in the run-up to polling day, is there much prospect of aggressive monetary stimulation or electoral bribes that are paid for later.
Having said that, the tensions between Tony Blair and Gordon Brown are a faultline that runs through the heart of government. And the strains showed again earlier this month. Although both men have since tried to paper over the cracks, there is little doubt that the tensions will resurface.
Things could come to a head after the general election, widely expected to take place on May 5 and almost certain to produce another Labour victory.
Who will be chancellor after the election? Mr Blair has refused to confirm it will be Mr Brown. He may even be emboldened to sack his chancellor if he gets a big majority - one that is comfortably over 100 seats, for example. Alternatively, if the majority is less than 50 seats, Mr Blair's position could be the one in danger.
UBS believes there is "a significant risk" that the two senior members of the government will part company "over the next few months" and believes the pound may well be a casualty of the fall-out. "If Brown does leave, we would expect sterling to be hurt by renewed uncertainty and for foreign investor confidence in the UK economy more generally to be undermined," says UBS analyst Mansoor Mohi-uddin.
Another big uncertainty for markets relates to taxes. It is increasingly taken for granted that either taxes will have to increase or spending go down after the election - and that Labour's preference will be the former.
It is generally assumed that the party will stick to previous pledges not to raise the basic rate of tax or the 40 per cent rate for higher earners. But electoral promises have been broken before. One alternative is that national insurance go up. This could easily have an impact on consumption at a time when consumers are already feeling the squeeze from higher interest rates, council taxes and utility bills.
There are other uncertainties too. Hard decisions about pensions have been postponed until after the election, but will have to be taken then. And, once the election is over, the countdown to the vote on the European constitution will begin in earnest.
None of this is to suggest the political risk is going to be the main influence on market sentiment this year. But in what seems likely to be a sluggish year for the market anyway, it is certainly something that investors should be taking into account.