The question is whether Labour can deliver

The sleaze wars may still be dragging on, but at least with the launch of the party manifestos we are now more obviously into the general election campaign proper.

With the stock market wobbling again this week it seems a good time to take another look at the possible impact which the election will have on the markets.

The first point to make is that elections rarely show the financial markets at their most astute. When the polls are right, as they were with the US Presidential election last year, they tend to look smart and when they are wrong, as they have been on several occasions, including the last British election, investors tend to look just as foolish as everyone else.

It is a moot point whether this phenomenon supports those who say that the markets are efficient at discounting future events, or those who take the opposite view. If political opinion is too volatile to be forecast accurately, then it counts as a plus point for the theory that current market prices accurately discount all knowable information. It merely proves that this kind of information is not capable of prediction.

The real answer, in all probability, is that it is a bit of both. Investors take the consensus view as the starting point - this time it points to a Labour victory - and place their bets accordingly. For most investors, elections are times of uncertainty and they know they don't have any special insight into the result. That is why they tend to react most negatively when the outcome is open to question, and are much more insouciant when the result looks predictable.

According to the latest prices offered by the spread betting firm IG Index the favoured outcome is for Labour to win around 370 seats, implying an overall majority of about 80 seats.

The interesting thing, as my chart suggests, is that while the punters have been anticipating a Labour victory for a long time, it is only since the Wirral by-election in late February that the betting has turned to possible landslide outcomes.

This seems to be a case of two things coming together at the same time - an actual election result which has confirmed the rather less-trusted message of the opinion polls, and adawning realisation that it really is time to start thinking about the election result.

It is one thing to have "factored in" the general possibility of a Labour victory but another to try to think through exactly what effect it might have on share prices and share values. It is no accident that in the past few weeks we have begun to hear serious worries expressed about the precise impact of a move by Gordon Brown to reduce further the ACT dividend credit enjoyed by pension funds and other tax-exempt investing institutions.

It is this single issue that worries professional investors about a possible Labour victory. Assuming that Labour wins and that Mr Brown pursues this option, it could have a serious negative impact on the stock market. Estimates of the likely impact range from anything between a 5 per cent and 20 per cent fall in share prices.

Of course, Mr Brown and his colleagues have done a pretty good job at convincing the markets that New Labour is not the threat it used to be. As the brokers James Capel pointed out in an excellent piece of research the other day, Labour has won plenty of plaudits for the potentially damaging things it has ruled out doing.

What's more, it also seems to have backed away from its threats to clamp down on takeovers by shifting the burden of public interest proof from the target company to the predator. This has warmed the hearts, and wallets, of investment bankers, brokers and all the other City professionals involved in the M&A business.

All this is good news, if you believe that Labour can actually deliver. You do not have to assume duplicity to have doubts that this may not be quite how things turn out. It would be astonishing if they did not try to be more ambitious in what they try to do than they have promised, and equally unsurprising if they did not make a botch of a lot of it in the early days. This is more likely with a large majority than with a small one.

As the economic issues at stake are serious ones, this is not a possibility to discount too lightly. For the equity market, the crucial issues will be how far Mr Brown moves to fill the gap in his budget calculations with additional taxes on the corporate sector and, more generally, how quickly and how effectively Labour is able to demonstrate that the way it implements monetary policy carries credibility.

The final point to note is that domestic considerations can only take you so far in trying to predict the impact of the election on the markets. What happens to the US market will also be a big factor. Wall Street has fallen quite sharply again this week. It is now down 9 per cent or so from its earlier peak, before the latest rise in US interest rates, and even a triumphant Labour baptism in office will struggle to make much impact on the markets against a background of any further falls on the other side of the Atlantic, even though the UK market is not as obviously as overvalued as the US one. All in all, then, it looks unlikely be a great year for the UK stock market - and possibly a bad one if Mr Brown wins and decides to grasp the nettle of taxation early and hard.

John Whiting and Brian Tora do not appear for lack of space. They will return next week, as will our usual savings and loans tables.