The UK joined the European Economic Community (EEC) in 1973. A couple of years later they thought, “errr”, and held a referendum on 5 June 1975 to decide whether to stay in. The electorate voted Yes by 67% to 33% to stay in the EEC. [Further information about the 1975 referendum can be found at Wikipedia.]
What impact did this referendum in 1975 have on shares?
The following chart shows the FTSE All-Share Index for the year 1975. The referendum was in June and is marked on the chart.
Quite clearly, the market was strong in the lead up to the referendum; part of this strength was as a result of the market bouncing off the multi-year low set in January 1975. The market peaked the day after the referendum, and then fell away afterwards.
This pattern of behaviour is similar to that seen for General Elections – equities are often strong in the months leading up to an election and then weak immediately afterwards. [More info on the stock market around UK General Elections.]
Let’s now zoom in and see what happened in the days around the vote.
The following chart shows the daily returns of the FTSE All-Share Index in the five days before and five days following the referendum.
So, some strength before, and then falling away quickly afterwards.
This pattern of behaviour is not what one might expect. Generally investors dislike uncertainty and so one might have expected to see weakness before the referendum and then a relief rally afterwards as the uncertainty is removed (regardless of the result). But that’s not what happened.
To get some idea of the state of the market and economy prevailing at the time of the referendum in 1975 the following extract comes from George G. Blakey’s superb A History of the London Stock Market 1945-2009.
Companies were not slow to take advantage of this new-found enthusiasm for equities to try to rebuild their balance sheets and in the three weeks to mid-March there were calls for £180 million in rights issues. They were relatively easily absorbed but kept the index below 300 until the budget in mid-April when expectations of action by the Chancellor on wages and public expenditure prompted a renewed advance. In the event a £1.25 billion increase in taxes through 2p on the standard rate and surcharges on drink and tobacco with VAT up from 8% to 25% on luxury items, was taken as evidence that Mr Healey meant what he had said about raising taxes unless the social contract was more strictly observed There was also a promise of a £1 billion reduction in public expenditure — but given that the PSBR for 1975 had more than tripled to £9 billion since he had become Chancellor, and looked like heading for £12 billion in the current year, this carried little weight. Equities received a further boost in early June from the Referendum resulting in a 2-to-1 vote in favour of the UK staying in the EEC and from further gains in the US taking the the Dow well above 800, but after peaking at 365.3, the index began to slip as investors turned their attention to what sterling was saying about the economic situation.
The momentum of the recovery in equities and gilts to a large extent had masked the deterioration in sterling, where the weighted depreciation had increased from 21.7% in early January to 28.9% by the end of June. But if the domestic market had been impressed for a time by Chancellor Healey’s “tough” budget, clearly the international community had not. Thanks to the plight of sterling, the message had got through at last to the domestic market, Mr Healey and the TUC included. To cure inﬂation by demand reduction alone would cause such severe unemployment that there was seen to be no alternative but to introduce a workable incomes policy combined with a reduction in public expenditure to put government ﬁnancing back on a sound footing and to leave room for resources to be diverted for the improvement of the trade balance and for productive investment. The demotion of Mr Benn from his post as Minister for Industry to the Department of Energy was another step designed to rebuild business conﬁdence.
It is interesting to note that the estimable George Blakey devotes just half a sentence to the 1975 referendum.
And a few other things that happened in 1975 (again the source is A History of the London Stock Market 1945-2009)-
- In January the FT30 was yielding 13.4% and selling on a PE of 3.8 (And, yes, this was the bottom of the market.)
- Burmah Oil called for government assistance to help service its huge US loans.
- Maurice and Charles Saatchi entered the public arena with a reverse takeover of quoted advertising agency, Compton Partners, with the new holding company called Saatchi & Saatchi Compton.
- In October Jim Slater announced his retirement from Slater Walker and City life. While this signalled the end of an era, on the other side of the pond 1975 saw Hanson make its major move into the US.
- Chancellor Healey introduced a 10% pay increase limit in an attempt to reduce inflation from 24% to 10%.
- In early November, Chancellor Healey made formal application to the IMF for a $2 billion loan; an IMF team later flew into London to “look at the books”.