NEWS & MEDIA

How will the Markets React to Thursday’s General Election?

5 June 2017

On Thursday the UK will be heading to the polls again, after Theresa May called a snap election In April. Although this has been seen largely as a Brexit election, it seems that a number of Cobyn’s Labour Party’s policies have captured the public imagination further than initially predicted.

Why did the PM call for an election now?

Despite ruling out a snap election when she took over as Prime Minister, May has clearly had a change of heart, calling for one on June 8, three years earlier than required. By doing so, she hopes to strengthen the Conservative majority enabling her to gain an upper hand during the upcoming Brexit negotiations, under her ‘strong and stable’ ticket.

Market Reaction

On April 18th, May’s decision to hold a snap election boosted the Pound which notched its highest level since last October, reflecting investors’ belief that a larger Conservative majority would help Britain clinch a better Brexit deal, and thereby avoid a cliff edge scenario.

Additionally, investors also seemed to be happy about the change in the election timetable. Market participants were concerned that an election in 2020 would cause the British PM to negotiate a hasty and unsatisfactory deal before the 2019 deadline imposed under Article 50. Looking ahead, Sterling will likely continue to hover around the $1.29 level, if the Tories remain in the lead.

In stark contrast to the spike in the Pound, the FTSE 100 index witnessed a decline on the day of the election announcement. Many of the multinationals in the FTSE 100 earn a large amount of their profits in US Dollars. Thus, a strengthened pound weighed on the shares of those companies.

Changing Opinions

Opinion polls had initially suggested a landslide victory for the Conservative party. However, a recent YouGov poll predicts that the Conservatives will fall short of an overall majority by sixteen seats, through which they can either try to govern via an unstable minority government, or join with another party in coalition.  Neither option is likely to fill the markets with much confidence.

In fact, a total of eight polls carried out since the May 22nd Manchester bombing have shown the Conservative lead over Corbyn’s Labour Party narrowing.  It seems to have slipped after unpopular education and social care plans were announced in their manifesto, compounded by May’s refusal to participate in televised debates. On the other hand, Corbyn’s populist measures such as the abolition of student tuition fees and return to state funded grants seems to have swayed support towards his party.

What Might Happen

From the recent experience of the Euro referendum, and even the last general election (as well as the US Presidential election!), we are right to be wary of opinion polls and their reliability in predicting final results.  But uncertainty can offer up opportunities, so we’ve taken a look at the three key potential outcomes and their likely impact on the markets.

Scenario 1 – Landslide victory for the Conservatives

The Conservatives would push for a ‘Hard Brexit’. However, they are pursuing a transitional deal and a Conservative win would mean less parliamentary opposition to Theresa May’s Brexit related proposals. Sterling prefers a stable political environment and is thus expected to receive a boost. While the stock markets will initially drop following the election outcome, it is expected to slowly welcome the result and stabilise.

Scenario 2 – Victory for the Labour Party

The main opposition party has vowed to pursue a softer departure from the EU. But with no concrete plan in place, the Sterling would most likely fall in the immediate aftermath of a Corbyn victory. Moreover, an anti-business candidate coming into power will be disliked by the stock markets as well – the party has proposed higher corporate taxes. So expect a freefall in both the pound and the FTSE 100, albeit the latter would find a floor sooner on account of companies who earn in dollars.

Scenario 3 – A Hung Parliament

Possibly the worst outcome for Britain as a hung parliament means no party has a clear majority. Britain will then be run by a minority or coalition Government. This would be a nightmare for Sterling and equity markets, as it would jeopardise Brexit negotiations and cripple the British government due to a potential deadlock on sensitive issues. This uncertainty factor is likely to prompt investors to shun British assets.

Conclusion

The upcoming General Election is crucial for Britain as it stares at a tenuous divorce from the EU. With Brexit being the biggest issue facing Britain today, the new Government needs to draft a policy which will ensure that Britain continues to run smoothly as its leaves the EU. The British economy needs leadership that does not look for a short-term, knee-jerk Brexit-focused policymaking, but one which puts forth a durable plan for the nation.

With polls increasingly indicating a much closer race than initially predicted, June 8 will be one of the most significant political and economic events in a generation.

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