Stop calling the UK Conservatives ‘pro-market’

By Antonia Oprita

Well, the (partial) results are in and the Conservatives have won one of the most uncertain elections in the UK.

The pound surged in response in overnight trading, with a lot of commentary describing the Conservatives as “pro-market.”

I must admit I have a problem with that description. I agree that some of Ed Miliband’s statements about freezing energy prices and capping rents have earned him the nickname “Red Ed,” but David Cameron isn’t far.

How can a party that subsidises buying property in order to boost house prices be called “pro-market”? The UK already has one of the biggest ratios of mortgage debt to GDP, as can be seen in the chart below.

Mortgages to GDP.

Mortgages to GDP, a comparison. Source: Scope Ratings.

The Conservatives have launched a few versions of “Help to Buy,” in which the state supports in various forms the purchase of houses, either by guaranteeing the deposit or by offering an equity loan.

Another move that may have swayed part of the electorate towards the Conservatives could be Cameron’s promise to continue Margaret Thatcher’s “Right to Buy” programme, under which tenants in subsidised accommodation have the right to buy their homes at heavily discounted prices.

In London, this will mean discounts of around 100,000 pound ($152,000) per home.

Even the Telegraph, the staunchly pro-Conservative daily newspaper that is dubbed “the Torygraph”, says this policy is “dumb, economically illiterate and morally wrong.” And, I would add, certainly disruptive for the market.

Another policy that proved to be very popular despite some teething problems was the launch of pensioner bonds.

These are bonds that can be bought by over 65s and which offer an interest of 2.8% for one-year bonds and of 4% for three-year bonds.

Currently, gilts (UK sovereign bonds) of the same maturities have yields of 0.47% and 0.99% respectively.

This measure cannot be called “market-friendly”, although it does offer some relief to pensioners, who have been hard hit by another market-distorting measure – the cut in interest rates to a record low and money-printing by the Bank of England even when inflation was running at more than 5% in 2011.

Perhaps the most popular (or populist?) promise made by Cameron during the campaign was the fact that his party would not raise the main taxes during the next parliament.

But with twin deficits – external and budget deficit – running at nearly 5%, closer to levels in developing countries than in advanced economies, the UK is full of “macro manure,” as bearish Societe Generale analyst Albert Edwards warned.

Investors should avoid being thrown in it.

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