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UK election: How investors are reacting

Peter Macdiarmid | Getty Images

As the U.K. prepares to vote in the closest-run election for decades, we take a look at how investors have reacted to the uncertainty surrounding Thursday's outcome.

At the moment, unless there is a substantial change in the last few days' campaigning, it looks like neither of the U.K.'s two main parties, the incumbent Conservative Party and challenger Labour Party, will be able to make a majority government.

This broaches the possibility of drawn-out coalition negotiations and extended uncertainty. There are also concerns that the Labour Party under its current leader Ed Miliband has moved closer to the party's socialist roots.

Weighed against this is the U.K.'s status as a safe haven, and the fact that all parties are committed to deficit reduction.


Bonds

A sell-off in the first couple of months in 2015 was followed by a rebound in March, according to data from the Bank of England.

Foreign investors bought £14.8 billion ($22.6 billion) of gilts over the month, after a net sell-off of £14 billion in January and February, suggesting confidence in the U.K. as a long-term safe haven. This may also be motivated partly by changing yields.

Whereas in January, the yields on U.K. 10-year bonds fell below 1.4 percent for the first time in history, as quantitative easing by the European Central Bank and Bank of England pumped cash into the financial system, by March they had started to rise towards 2 percent again (before falling to close the month at 1.58 percent).


Funds

Investors withdrew a total of $24 billion from the U.K. in March, according to figures from CrossBorder Capital, an investment advisory group.

Meanwhile, the Investment Association, a U.K. investment managers' group, said that close to £1 billion flowed out of U.K. equity funds in March - the largest net outflow ever.


This is likely to have been motivated by several factors including the uncertainty around the outcome of the election. Another could be Russian investors withdrawing cash after President Vladimir Putin announced a crackdown on capital flight from the country late last year.

If this trend continues, sterling, which has been resilient this year despite the uncertainty, could weaken – although this may help U.K. exports.


Property

London property, which has been in a league of its own for the past couple of years, is experiencing a pause, particularly at the high end of the market, as the election nears. One of Miliband's pledges is the "mansion tax," a levy on owners of properties valued at more than £2 million.

Foxtons, the real estate agent synonymous with the London property boom for many, booked revenues 3.1 percent lower than in the first quarter of 2014 in the first three months of this year, and warned that buyers were putting off decisions until after the election.

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This article has been updated to reflect that the Bank of England revised its data on U.K. gilts purchased by overseas buyers from £28.2 billion to £14.8 billion.

- By CNBC's Catherine Boyle