Blair to Brown = Stocks go down?

Investors have had a long time to digest the forthcoming departure of Tony Blair but, now that the date is nearly upon us, will concerns arise?

In the short term, the transition from Blair to Brown is likely to be smooth and the new Chancellor will be carefully chosen by Mr Brown to pursue the policies he has already largely put in place. Markets are likely to take their cues from elsewhere.

The equity market in particular is unlikely to pay much attention. There are far bigger drivers of share prices at play – not least the ongoing M& A wave, which is not going to be stopped by a change of face at Number 10.

Bonds may be a little more interesting. We have seen gilts under perform European government bonds over the past year. Part of this is doubtless to do with rising UK interest rates and inflation, but there may be an element of political uncertainty in the underperformance, and this uncertainty will drop out now we have a date. Indeed, gilts’ relative performance has improved over the past few days.

In the medium term there may be concerns about Gordon Brown moving the party back towards its traditional values, particularly as Mr Brown will be fighting a deteriorating economy as the days to the next election count down.

One possible scenario is that the new Prime Minister could seek to engineer a “mini-boom” before calling an election. Such a mini-boom could well be met with inflation fears and higher interest rates from the Bank of England, whose very independence was brought about by Gordon Brown ten years ago. This is speculation, but speculation and sentiment have been known to move markets. And how ironic it would be if Brown’s best move as Chancellor were to come back to haunt him as Prime Minister.

For the time being, though, the scenario outlined above remains a distant possibility and markets will continue to focus on the cocktail of growth, valuations, takeovers and regulatory demand that has driven them over the past three years.