UKJun 7 2017

UK election uncertainty vexes investors

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UK election uncertainty vexes investors

Data published by YouGov on May 31, suggesting recent gains by Labour could deny the Conservatives an overall majority, caught managers off guard and led to investors considering alternative scenarios.

Sterling fell back on publication of the forecast, having risen almost 4 per cent since the election was announced on expectations that a larger Conservative majority would allow Theresa May to implement a softer Brexit. The currency fell 1 per cent in the final week of May as polls tightened.

While a Labour-led coalition would likely also favour a softer exit from the EU, commentators suggested the spectre of a hung parliament had spooked markets due to the instability it would cause.

James McCann, an economist in Standard Life Investments’ multi-asset team, said markets could react badly – worse than was seen following 2010’s hung parliament. 

He said: “You would get some depreciation on the currency and risk assets would do poorly in the immediate aftermath as they get to grips with the Brexit timeline ticking [away] and not knowing what the policy agenda looks like. You would have to watch the situation from an asset allocation standpoint and be nimble thereafter. 

“If you got a coalition that looked relatively stable and able to put forward a policy agenda it would have clearer effects for different asset classes.”

JPMorgan’s head of global foreign exchange Paul Meggyesi suggested this was misguided. A Labour-led coalition government would be supportive for sterling, he said. 

Mr Meggyesi said a greater Conservative majority would still mean a hard Brexit, leaving a left-leaning coalition government as the only option for a less extreme agreement.

He said: “We do not expect any real relief rally in sterling on a Conservative victory. An argument can be made that a hung parliament, which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties, might actually be positive [for sterling].”

YouGov figures are out of sync with their peers; most forecasters still expect a Conservative victory. However, with all polls showing a closer race than had been expected, the odds that the election does not produce political certainty are rising.

The pound has had an inverse correlation with large-cap UK equities over the past year, its weakness being seen as a positive for stocks deriving revenue from overseas. But even equity managers who believed a hung parliament would hurt the pound said they were not hoping for this outcome.

Serge Pépin, European equity specialist at BMO Global Asset Management, said the uncertainty would more likely lead to a spike in gilt yields and sterling would lose further ground against the dollar and euro.

He said: “While a weaker sterling would initially continue to benefit British multinationals and the blue-chip stock index, its effect could prove temporary as investors would be tempted to find safer harbours in more politically stable economies.” 

Mr McCann said the impact would be more nuanced. Additional attention would need to be paid to specific UK equity sectors and gilt issuance, he said. “A micro equity investor would need to work out what the configuration of policies would mean for individual companies and allocate accordingly. Some policies you might get from a [Labour coalition] could be sterling supportive over time. Particularly on the fiscal side, it does suggest short-term growth could be higher and would be factored into to how the Bank of England looked at policy.”

Numbers: 

20 points: Conservative poll lead on April 18, when the election was called

9 points: Conservative lead in FT poll of polls as of June 1