How Could The General Election Affect Your Investments?
Since June 2016 when Britain went to the polls and voted to leave the European Union, our country has been in turmoil. This election, we hope, will lead to the end of Brexit uncertainty, but there is no guarantee.
Currently, according to the polls, the most likely outcome is that of a Conservative majority. This would give Boris Johnson the power to push through his current withdrawal deal, possibly as early as January 31st. It does not however mean the end to uncertainty as a ‘no deal’ Brexit could still be a possibility, which is perceived as damaging to markets, leaving investors still nervous.
A hung parliament would reduce the chances of a no deal scenario but would probably mean even more uncertainty due to the House of Commons being unable to reach an agreement. This too would likely be damaging to markets, unless it led to a second referendum and a potential route out of Brexit.
If Labour were to seize control of parliament, there is a possibility it would be viewed positively with regards to a second referendum. However, most of their policies are viewed as market unfriendly, Gilts would likely struggle given Labour’s hefty borrowing requirements.
The following table, from Aberdeen Standard Investments*, details the resulting market impact from different election scenarios:
| Scenario | Description | Assumptions and Waymarks | Economic Policy | Market Impact |
|---|---|---|---|---|
| Conservative government | Conservative party gains a majority to form government and pass Withdrawal Agreement | Brexit Party doesn’t challenge Conservative
strength and/or provides some informal support
Polling support levels and leader popularity hold relatively steady through election for Labour and Conservatives Election focused entirely on Brexit Labour and Lib Dems split vote leaving Conservatives to pick up spoils |
Revealed preference for negotiated Brexit reduces fears
of No Deal
However, the new withdrawal agreement does point to a relatively loose future relationship with the EU while negotiations over future partnership will be an ongoing source of uncertainty Fiscal easing geared towards spending increases rather than tax cuts given the Conservative’s new voting coalition will be less affluent at the margin Bank of England politicisation looks much less likely than Hard Brexit government |
£ Trade-weighted up 5-7% initially but some retrenchment likely
Gilts underperform cross market by max. 20bps depending on majority Credit spreads tighten 5-10bps depending on majority FTSE down slightly in sterling terms, strong rotation to UK domestics with a 5-10% rerating on top of the currency benefit |
| Hung Parliament* | No party gains majority and parties fail to build governing coalition around unified Brexit view | Parties run divided campaigns with no
pre-election collaboration
Tactical voting does not occur, so vote is split between Labour and Lib Dems Farage refuses to work with Johnson SNP demand Scottish referendum from Labour for support; Labour refuses |
Uncertainty continues to weigh on activity, business investment in particular, as cliff edge rolls out again
BOE on hold but potential to ease |
£ Trade-weighted 0 to 5% weaker
Gilts outperform cross market by 10bps due to BOE signal Credit spreads unchanged as BOE nets off against uncertainty FTSE up slightly in sterling terms, modest rotation away from UK domestics with a ~5% derating on top of the currency hit |
| Remain government | Labour party unites with pro-Remain parties (Lib Dems, SNP) to build government and hold second referendum | Public opinion shift polarises further on No Deal and Remain
Lib Dem party mobilises effectively;coordination with other Remain parties possible Conservative party and Brexit party compete for seats Tactical voting does not occur between Labour, Lib Dems, SNP |
Referendum extends uncertainty but strong expectation of remain reduces risk
Fiscal easing but constraints on Labour’s broader policy agenda Upward pressure on rates | £ Trade-weighted up 10-15%
Gilts underperform cross market by >20bps Credit spreads tighten 15bps initially but may retrench under uncertainty and hawkish BOE FTSE down slightly in sterling terms, modest rotation to UK domestics with a ~5% rerating on top of the currency benefit |
| Hard Brexit Government | Pro-Brexit parties (Conservatives, Brexit party) unite leading to harder Brexit outcome with Brexit party kingmaker (10 seats or more) | Brexit party mobilises effectively to take ‘Leave’ seats
Criticism of the WA increases through the campaign Tactical voting occurs in Labour’s favour | Recession in event of no deal,
with spike in inflation
Significant fiscal easing no detail but perhaps more ‘populist’ Bank of England eases policy High risk of monetary policy ‘politicisation’ |
£ Trade-weighted -15%
Gilts outperform cross market by max. >10bps depending on majority Credit spreads widen 30-50bps restrained somewhat by BOE |
| Labour government | Labour party gains a majority to form government to deliver second referendum | Strong tactical voting benefits Labour party
Lib Dems struggle to build ground game Conservatives and Brexit party compete, splitting vote share Corbyn popularity rises sharply through campaign Election not solely focused on Brexit Conservative party scandal | Conflicting forces on the path of policy
Headline Labour policies – a softer (or no) Brexit along with much easier fiscal policy – tend to push towards higher rates on a higher nominal growth outlook However, the adverse financial market reaction our PMs anticipate would tighten financial conditions and may see Bank ease, especially if the shock to business sentiment is especially acute | £ Trade-weighted -5% but uncertainty high as investors trade of Brexit vs domestic policy
Gilts underperform by at least 20bps on Brexit signal Credit spreads widen 10-20bps FTSE up slightly in sterling terms, strong rotation away from UK domestics with a ~10% derating on top of the currency hit, with utilities and financials particularly negatively impacted |
Risk Warning
The value of investments and the income from them can go down as well as up and you may get back less than the amount invested.
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