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How the general election result could move markets

How the general election result could move markets

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?

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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.