'City' shivers at British election suspense

Britain's political outlook is far from clear ahead of Thursday's general election, risking a period of uncertainty for London's financial district, something the City never welcomes.

"Markets may be in for a very bumpy ride in the immediate aftermath of May 7th," said Oliver Harvey, foreign exchange strategist at Deutsche Bank.

Prime Minister David Cameron's centre-right Conservatives, in power since 2010 as part of a coalition government, are neck and neck with the opposition Labour party in opinion polls.

Experts say that Britain is set for a hung parliament, meaning that the Conservatives or Labour will have to team up with a smaller party to govern.

"In theory, fragile governments based on small majorities or shaky coalitions could undermine the economy by fostering uncertainty," said Samuel Tombs, UK economist at Capital Economics research group.

"In particular, firms might not invest if they believe the government may change soon, leading to a new set of tax and competition policies.

Tombs added that "weak governments may not undertake beneficial structural reforms that involve short-term costs and may struggle to achieve a consensus for measures to reduce the deficit".

According to the Investment Association, a body representing investment managers, private investors withdrew £1.0 billion ($1.5 billion, 1.37 billion euros) from UK equity funds in March.

"Private investors are staging a buyer's strike in the lead up to the election. This is pretty par for the course when it comes to the uncertainty generated by such a big political event," said Laith Khalaf, senior analyst at Hargreaves Lansdown stockbrokers.

The significant withdrawal amounted to profit-taking after recent highs for London's benchmark FTSE 100 index, which includes many companies whose profits are sourced from abroad with earnings made in dollars.

British stocks are meanwhile expected to continue to win support from the stimulus measures carried out by central banks around the world.

- Tax pledge -

As parties battle to win over the undecided voters and offer a degree of certainty to markets, Cameron this week promised to ban major tax increases for the next five years if his party manages to win re-election.

The prime minister pledged to pass a law introducing a "tax lock" to prevent increases in income tax, value-added tax or national insurance contributions to state benefits.

That has done little to calm City jitters.

Global banking giant HSBC has said it is reviewing whether to remain headquartered in Britain.

Although the bank's shock announcement was more a response to the prospect of increased regulation and taxation of the sector whoever wins power, it added to the pressure faced by the current government.

- Solid growth -

Heading into the election, the International Monetary Fund has forecast solid economic growth for Britain for this year and next, at 2.7 percent and 2.3 percent respectively.

This could be revised lower, however, after official data on Tuesday showed Britain's economy grew far slower than expected in the first quarter of 2015.

"A minority government might mean political gridlock, but with the economy growing solidly, gridlock probably would not be risky in economic terms," said Michael Saunders, an economist at Citi Research.

Other risks remain, notably surrounding Britain's future in the European Union, as well as the prospect of higher interest rates and the possibility of another referendum on Scottish independence from the rest of the UK.

A general election won by the Conservatives would trigger a referendum on Britain's membership of the EU by 2017, something Labour has opposed.

Cameron supports UK membership but has promised an in-out referendum to counter the rise of UKIP, the anti-EU and anti-mass immigration party that won the 2014 European Parliament elections.