By Gregor Stuart Hunter Published: 12:19PM BST 09 Apr 2010  With the general election campaign under way at last, Britain's streets are bustling with party activists, rosettes and the odd campaign battle bus.  However, behind the electoral drama lie worries about how the next government's measures to rein in Britain's £167bn fiscal deficit will affect investments in stocks, pension funds and the value of sterling.  At stake is Britain's AAA credit rating. A downgrade of sterling bonds – also known as gilts – would also push up the price of borrowing for companies. Can voting make a difference to your nest egg?  Historically, stock markets have performed better under the Conservatives, as shown by a study from the Centre for Policy Studies, which may make depressing reading for Gordon Brown.  It said: "During all the periods in office of Labour governments since the war, equity shares have performed poorly. This happened in 1945-51, 1964-70 and 1974-79, when indices showed losses of 8pc, 13pc and 11pc respectively after adjusting for inflation."  However, the worst stock market performance during any government of the 20th century belongs to Conservative Neville Chamberlain in the Thirties. During his government, annual returns on equities fell by 11.47pc, according to a study by Fidelity.  With the possibility of a hung Parliament looming, market jitters are likely to prevail until a new occupant enters 10 Downing Street.  Some fund managers are taking some risk off the table. Richard Buxton, head of UK equities at Schroders, said that if there is any consensus among investors, strategists and financial commentators, it is that in the run-up to polling day sterling will weaken further, gilt yields will rise and the equity market will fall.  He added: "As this outcome looms ever closer, so investors will sell sterling, gilt yields will rise in anticipation of the UK losing its AAA-rated sovereign status – plus heavy gilt issuance as far as the eye can see – and equities will inevitably be dragged back by rising bond yields.  "Clearly, as markets traditionally hate uncertainty, it would be no surprise if equities were indeed nervous and weak ahead of the election. Highly respected investors are sitting cashed up on the sidelines, shaking their heads in disbelief as the market grinds upwards. Investment flows are out of equities, not into them."  Chris Bowie, manager of Ignis Corporate Bond fund, has rejigged his portfolio amid fears over a hung Parliament and uncertainty with the global economy.  Mr Bowie, who feels that gilts still represent a haven for British investors, has moved about a third of the portfolio into government securities and the safest corporate paper, including utilities E. ON, Vattenfall, RWE and EDF. The move represents a significant change of direction, as the £290m fund has been in a ''comfortable'' overweight risk position for the past 12 months.  Mr Bowie added: "If polling for the forthcoming election proves to be accurate, then the Conservatives will fail to secure an outright majority. Markets may take a dim view of this as the new minority or coalition government may be unlikely to take the decisive fiscal action to secure the UK's coveted AAA status.  "Whatever the outcome, political risk remains high and that will generate further volatility. This is not an environment in which to have too much exposure to riskier bonds."  In the event of a photo-finish, Westminster would be occupied with horse-trading and compromises as parties sought to form a coalition government – which could give fright to stock investors.  Jeremy Batstone-Carr, head of private client research at Charles Stanley, said: "Historically, new parliaments have been formed within six days to one week. Parliament will resume on 18 May – that's quite a significant period of time after the election.  "If we get a hung Parliament and no clear majority, the markets would be expected to hate that – policy paralysis combined with a 12-day hiatus, in which the parties attempt to form a government."  However, sharp swings in equities could follow an unexpected outcome – such as the surprise Conservative win in 1992, which accompanied a 9pc jump in the FTSE 100 the week after the election.  Mark Hall, UK fund manager at Rensburg, said that a consensus had emerged among traders that the Conservatives would win a slim majority, but he worries about the impact on markets if Labour pulls off an unexpected outright victory.  However, he said: "It's the potential surprise outcomes which could create both threats and opportunities. There's a very clear consensus baked into the market.  "I think the equity market is priced for a 'Goldilocks scenario' where it's neither too hot nor too cold. What's certainly not been priced into the market is Labour managing to cling onto power somehow.''  Ben Yearsley, at Hargreaves Lansdown, said that British investors had little need to panic. "There's no reason to suggest that the FTSE 100 won't carry on the way it's going. We'll see the FTSE going through the 6,000 mark before the end of the year. There's no reason that we cannot see that in a month to six weeks."  Investors would do well to consider how their gains from the recent stock market rally can be protected under any of the possible poll outcomes.  But Mr Batstone-Carr warned that markets presented slim pickings for investors, as many stocks were now highly priced after more than a year of gains.  "While we've seen a very substantial rally, which may make middle-class investors feel better off, the market is no longer as attractively rated on valuation grounds now as it was 12 months ago," he said. "We take the view that when you buy into an overvalued stock market, that's tended to depress returns over the next decade."  Experts agreed that because of the international nature of many companies on the FTSE 100, certain sectors remain safe bets even in the event of political deadlock in Britain.  Mr Batstone-Carr added that sectors with little exposure to the British economy would be safer bets to lock in returns in an uncertain political climate.  "Mining companies have little more than a rather smart head office in the central districts of London: their operations take place overseas and it's fair to say they are uncorrelated with the UK economy," he said.  Jonathan Jackson, head of equities at Killik, said that education publisher Pearson and IT firm Autonomy were also well-placed to avoid turmoil in the British economy, owing to a high proportion of overseas earnings. By contrast, general retailers operating in Britain are expected to perform poorly over the next few years.  But Mr Hall said these expectations have left some well-managed UK retailers attractively priced.  "Some are priced never to grow again – Next for example – even though over the past few years it's held up relatively well and its management has done a very good job of protecting P&L."  Bolder investors can tilt their portfolios towards sectors where political considerations could make a significant impact.  Mr Batstone-Carr reckons that uncertainty over the strength of the British economy could endanger profits at banks with large UK operations. "The banks are probably the major imponderable – outside of HSBC and Standard Chartered, they are very domestically orientated.  "There is uncertainty over the pace of the fledgling economic environment – that will mean of course pressure on household incomes and potential problems as far as impairments and credit ratings are concerned," he said. "That could mean potentially more bad debts, and more write downs."  Mr Yearsley said that there were clear moves for the cautious investor: "Defensive stocks, such as utilities, present a good buy should political uncertainties plunge us back into recession. Shares on a yield of 5pc, 6pc or 7pc are worth a look."  Investors who predicted that the pound would devalue in the run-up to the election will be in the money, but some analysts, including Barclays Wealth say the smart money is on Sterling strengthening post-May 6.  You can make money on currency movements, but it is very risky. A spread betting firm will give a spread price on a currency market, such as the sterling/dollar pair of $1.51807-$1.51827. If you think that the sterling/dollar rate will increase, you would buy the spread price, or if you believe it will weaken you would place a sell bet.  These are "pound per point" bets, so place a buy bet with a £2 stake, you'll make £2 for every point the pound rises above your entry level. Get it wrong you'll pay £2 for every point it moves in the wrong direction.
Shares tend to do better under the Tories &ndash; but will history repeat itself if    they win this general election?