BONUS: UK election special: Corbyn vs. Boris and the great battle for Britain
The general election on December 12th is hotly anticipated by traders across the globe. The result is likely to be a key driver of the pound and UK stocks and bonds into the end of the year due to the vastly different political ideologies held by the two front runners and the impact on Brexit from this election result.
Firstly, we will look at the current polls, and the potential outcomes from this election. After that, we will look at the potential market reaction from 3 of the most likely outcomes and what they could mean for UK stock prices and the pound.
1, Polls and the potential outcomes
We prefer to look at the poll of polls rather than individual polling reports as this can give a more rounded view. At the time of writing, the Financial Times’ poll of polls has the Conservatives at 43% and the Labour Party at 32%. Since this election was called, the Conservatives have maintained a steady lead above Labour of approximately 10%.
However, it’s always wise to take the polling results with a pinch of salt, as they measure the percentage of the national vote that each party is expected to win, which is not always an accurate way of predicting the outcome of UK elections. This is because we have a first past the post voting system, which makes it hard to decipher how many seats each party will win based on the percentage of the national vote that they win.
Tories set to win a large majority – most reliable poll
The MRP poll, conducted by YouGov and released last week, which is considered the most accurate way to predict how many seats each party will win, pointed to a comfortable win for the Conservative party with a potential 68-seat majority for Boris Johnson’s government. Thus, for now the majority of the polls are pointing to a win for the Conservatives, which has been the prevailing trend throughout this election cycle.
Most likely outcomes:
The main shifts in polling suggest that support for the Brexit Party has all but disappeared, they are currently expected to win just 3% of the national vote, even though they have fielded a number of candidates in seats that the Conservatives did not win in the 2017 general election. Support has also fallen for the Liberal Democrats, who are running a ‘reverse Brexit’ campaign. This suggests that Brexit, although an important issue in this election, is not the electorate’s only focus.
This election has become a two-horse race, however, the two most likely outcomes, in our view are:
1, an outright Tory majority, or 2, a hung parliament.
Labour’s share of the vote may have picked up in recent weeks, but it is still lagging behind the Conservatives. If the MRP poll is correct and Labour only manage to win 211 seats then it would struggle to form a coalition with the political parties closest to its own ideology, as to command a parliamentary majority a coalition government would need 326 seats. Thus, we believe that a win for Labour, either on their own or in coalition, is a low probability event with a week to go before we head to the polls.
However, if the polls are wrong, and if the Conservatives can’t win an outright majority at this election, then we don’t believe that they will be able to form a coalition government either due to the vastly different policies and stances on Brexit between the Conservative Party and other potential coalition partners including the Liberal Democrats and the SNP. In the event of a hung parliament where the party with the largest number of seats cannot form a coalition, then another election would look increasingly likely.
At this stage of the election campaign, we believe that the most likely outcomes from this election are:
1, Conservative majority.
2, Hung Parliament, without much prospect of a government being formed, thus another election would be the most likely outcome.
3, Labour victory – either outright or as the leader of a coalition government.
Potential market reaction:
Due to the potential for shock results and inaccurate polls, we prefer to look at the potential market reaction caused by the three scenarios that we outline above.
1, A Conservative majority
This is the most market-friendly outcome. The Conservatives are generally considered capable at managing the UK economy and keeping public debt levels in check. This is one reason why the pound has surged to the highest level since May with one week before voting begins, as the FX market rushes to price in the prospect of a Conservative victory. However, “buy the rumour, sell the fact”, as the saying goes, could lead to a short-term sell-off for the pound on the back of a Conservative victory, particularly if GBP/USD rises above $1.33 in the days before the election. Overall, the key things for traders to bear in mind from a Conservative majority include:
· Brexit will get done by January 31st.
· Parliament could run smoothly compared to the chaos and uncertainty of the last 2.5 years.
· Public spending is likely to rise under a Conservative government. While this will put pressure on the UK public finances, we believe that the spending could be growth positive and won’t trigger any credit-rating downgrades for the UK, unless the Conservatives spend more than they are currently projecting.
· The cliff-edge trade deal deadline with the EU for the end of 2020 is a concern, however, we have seen in the past that cliff edge deadlines are easily moved when it comes down to the wire, and we believe that a Conservative government, especially with its anti-EU segment hollowed out, will prioritise a trade deal with the EU, rather than see us leave without one.
Overall, we believe that a Conservative majority is good news for the pound as political uncertainty will be reduced. A rise to $1.40 in GBP/USD over the course of 2020 is possible, especially if growing public spending helps to boost the UK’s lacklustre growth trajectory. UK-focused stocks, especially the FTSE 250, may also benefit from a Conservative majority. There could also be big relief rallies for British utility companies including Severn Trent and the National Grid, BT and UK rail providers, all companies that were threatened with nationalisation in the Labour manifesto.
2, A hung parliament
As mentioned above, this outcome could leave the UK rudderless and ultimately lead to another general election. This outcome would likely delay Brexit and delay any increase in public spending, which could weigh on the UK’s growth rate in 2020. UK growth is already looking like it may have contracted in the last three months’ of 2019, so parliamentary chaos is likely to be bad news for the pound, and GBP/USD may fall back to the $1.25 level, domestic focussed stocks and the FTSE 250 may also suffer.
A weak economy, an uncertain future for Brexit and a rudderless UK is a bad outcome for UK financial asset prices in our view.
3, A Labour win, or a Labour-led coalition
This is the least likely of all the possible outcomes from this election, in our view, as the election looks like it is Boris Johnson’s to lose at this stage. However, if Labour does pull off the impossible then a Corbyn-led hard-left government would likely terrify the financial community and could cause a major rout in UK asset prices. Below we list the potential impact that this could have on financial markets.
· The pound could be under attack if the UK loses its credit rating due to the vast increase in public spending that Labour promised in its manifesto, that is expected to be mostly funded through borrowing.
· The pound may also suffer from more Brexit uncertainty as the Labour Party has said that it will hold another referendum. Current price action suggests that the FX market also wants to “get Brexit done”.
· UK stock markets, both small and large caps, could fall sharply due to Labour’s policies including employee ownership schemes of listed companies, higher corporate taxation, and a large increase in public spending at the expense of private investment, which may not lead to growth in the long term. Nationalisation schemes would also bring fear to UK stock markets, in our view, and both the FTSE 100 and the FTSE 350 could come under pressure.
· A Labour-led coalition may not be as negative for UK asset prices in our view, as Labour’s coalition partners could moderate the most extreme Labour economic policies, however it is hard to get an idea of what asset prices would do in this scenario as the outcome is so unlikely.
Overall, this election will either deliver the predictable result – a Conservative majority, in which case the pound’s rally could stall in the short term as that victory is currently being priced in, although this would be positive for UK asset prices in the long term, or a “shock” result of a hung parliament. In this scenario we would expect the pound to fall along with UK asset prices, particularly utility companies and other targets of Labour’s nationalisation programmes. With little hope of a government being formed unless some or all parties put their differences and principals aside – not unheard of in the world of politics – we could be in for a winter of discontent for the pound and UK stocks if the Conservatives do not win an outright majority on December 12th.
We hope that the above scenarios are helpful, and we would recommend that anyone trading around 12thor 13thDecember, use risk management techniques as UK asset prices are likely to be volatile.