When prime minister Theresa May unexpectedly called a general election for tomorrow (8 June) back in mid-April, her Conservative Party’s lead was large.
After several policy gaffes and with the Labour Party’s campaigning striking a chord with younger voters, Mrs May’s lead is dwindling and some polls are indicating she could even lose her majority altogether.
So what could the different make-up of government come Friday mean for investors?
We asked investment experts to explain what impact the general election result could have on markets on Friday (9 June).
Conservative majority
From the point of view of the market, Matthew Jennings, investment director for UK equities at Fidelity International, said a sizeable Conservative majority would be the preferred outcome from this election and it is also very much the anticipated one.
In this event, Mr Jennings said we would be unlikely to see a significant equity market movement, all other things being equal.
While many investors might have been hoping for a landslide, most polls do show a narrowing between the two main parties with Mrs May remaining prime minister.
The continuity offered by even a small majority for the Conservatives would probably still come as some relief, according to Mr Jennings.
He said: “For investors, a Conservative government would allow for a recovery or stabilisation in sterling exchange rates.
“This could, in turn, end the boost experienced by companies listed in London with revenues from outside the UK.
“However, that might not last: investors’ attention will turn to negotiations with the European Union, which are likely to be extremely challenging whoever is in power and whatever the size of their majority and could well be a source of further volatility in both currency and equity markets.”
Hung parliament
A hung parliament would see the market trying to get to grips with two competing narratives.
Firstly, the old truism ‘the market hates uncertainty’ is likely to trigger currency and market volatility as investors ponder the scale of compromise to be made between parties of whatever hue as they try to form a government, according to Fidelity’s Mr Jennings.
Secondly, assuming that the Scottish National Party or the Liberal Democrat Party plays a significant role in any coalition, Mr Jennings said a second Brexit referendum would suddenly become a real possibility for the first time, making investors re-assess their assumptions about Britain and the European Union.
Overall, despite some inevitable volatility, Mr Jennings said the market is likely to wait and see what government emerges from the hung parliament before deciding how to react.
Labour majority
According to Fidelity’s Mr Jennings this would be a remarkable surprise and the market is initially likely to focus on what investors might think is the worst-case scenario under a Labour government led by Jeremy Corbyn.
Many of his party’s manifesto pledges are specifically designed to reduce the profitability of the UK corporate sector and to capture a greater share of GDP in taxation to fund public spending.
The market would also have to grapple with the prospect of nationalisation occurring in certain sectors.
Mr Jennings said: “We should expect significant volatility in currency and equity markets as domestic and overseas investors adjust their exposures to reflect lower levels of expected corporate profitability in the UK under a Labour government.
“However, this pessimistic (from an investor point-of-view) scenario assumes that Labour’s manifesto pledges are successfully legislated.
“It seems extremely unlikely that such a transformative programme could be enacted (at the same time as challenging Brexit negotiations), as Corbyn has much less support among Labour parliamentarians than the party’s electoral base.
“It is quite possible that the market’s initial over-reaction to a Labour victory would create opportunities for companies which produce things that people will want to buy whichever party is in government.”
What to advise
John Wyn-Evans, head of investment strategy at Investec Wealth & Investment, said as has been the case in all recent votes, the pound remains the main barometer of sentiment.
The more uncertain the outlook for Brexit negotiations, the further it falls, thanks to the fact that the UK continues to run a large current account deficit, and funding it becomes more difficult against a background of uncertainty.
However, Mr Wyn-Evans said ahead of voting tomorrow (8 June) the asymmetric downside risk to sterling identified ahead of last year’s European Union referendum is nothing like as extreme this time.
This is because the pound has already fallen a long way and is generally considered to be better value.
Mr Wyn-Evans said: “Large capitalisation equities will continue to follow global trends owing to their heavy overseas earnings exposure, with a weaker pound providing something of a boost.
“Mid and small-cap equities with more domestic exposure would fare less well under a weaker pound, reversing some of the recovery they have made as the pound rallied and the economy surpassed most expectations.
“Gilts also tend to follow global trends, but, as we saw last summer, can benefit from their safe haven status in uncertain times.
“However, we suspect that they would not react so well to ‘tax and spend’ Labour plans, even though Labour offers a ‘softer’ Brexit.
“Also, with a yield of just over 1 per cent, the conventional UK 10-year gilt continues to offer little return. We have a marginal preference for index-linked gilts which offer protection against inflation caused by a weak pound.”
Jason Hollands, managing director of communications at Tilney Bestinvest, said Sterling was the primary lightening rod or shock absorber for event risk.
So far, he said the markets have been factoring in a larger Tory majority as the central scenario despite the narrowing of the polls.
Mr Hollands said: “You could argue that is complacency but the polls, which are typically conducted online with small sample sizes, are unlikely to reflect the ground war in the 100 or so constituencies where this will really be decided and where the Tories can deploy a bigger war chest.
“Notably volatility remains very significantly below other recent UK political events including the Scottish independence referendum, the 2015 General Election and the Brexit referendum.
“In many ways markets have got increasingly sanguine about political event risk because there has been so much of it over the last couple of years.
“The relatively low volatility also undoubtedly partly reflects the fact that many overseas investors have been underweight UK assets since the referendum last year, so political risk in as far as the Brexit process goes is partially baked in already.
“If anything the weight of market opinion has moved towards viewing Sterling as oversold given the economy has outperformed expectations.
“So with the polls both narrowing overall, and quite a bit of dispersion depending on the methodologies used, but volatility very low, there is some risk of an adverse reaction if the perceived market-friendly scenario of a significantly increased Tory majority doesn’t play out.
“A majority above 50 seats will probably be seen as a credible win. In this scenario, we might see a modest relief rally in Sterling but overall market reaction would likely be muted
“A market-unfriendly outcome such as a surprise outright win by Labour or a hung parliament would almost certainly see a negative reaction from Sterling but could also see a spike in gilt bond yields.
“There’s a lot of scepticism in the City over Labour’s tax and spending plans – including no costings on the proposed nationalisations – which implies growth in the deficit.
“While renewed Sterling weakness might be supportive of large-caps with predominantly overseas earnings, higher corporate taxes would not be welcome, there could also be a negative reaction from domestically focused UK-mid caps which have rebounded since the sharp sell-off in the aftermath of last year’s referendum.”
emma.hughes@ft.com
