How could the general election affect your investments?
This election, fought on the battle lines of Brexit, has the potential to move markets.
With the nights rapidly drawing in, it feels odd there is a general election around the corner. We live in unusual and uncertain times. This election, fought on the battle lines of Brexit alongside perennial issues such as health, education and crime, is a difficult one to call – as is the market reaction. We live in hope it might lead to the end of Brexit uncertainty, but fear that’s not going to be the case.
Currently, the most likely outcome, according to the bookies and the polls, is a Conservative majority. This would allow Boris Johnson to push through his current withdrawal deal, perhaps as early as the 31st January. However, because Brexit is a complex process that will go on for years it doesn’t mean an end to uncertainty. It also doesn’t eliminate the possibility of an eventual ‘no deal’ Brexit, something many investors fear, if trade negotiations grind to a halt during the ‘transition period’.
It’s therefore hard to say whether a convincing Conservative victory would please the market that much. It is interesting the pound got a recent boost from Nigel Farage’s announcement the Brexit Party won’t be fielding candidates against Conservative incumbents. Ultimately, though, a Tory majority leaves the door open to the possibility of a no deal outcome, which is perceived by the market as damaging.
Meanwhile, a Conservative victory with no majority, or a hung parliament, would probably mean overall parliamentary arithmetic on the issue of Brexit doesn’t change much. This would reduce the chances of a no deal but would probably mean a continuation of the impasse in the House of Commons – and even more uncertainty. Back to square one, and markets will probably not like this outcome much unless it leads to a second referendum and a potential route out of Brexit altogether.
One thing a Conservative victory would achieve is a second defeat of Jeremy Corbyn’s far-left agenda, and this might offer some comfort for the UK stock market, particularly certain sectors such as utilities, rail, outsourcing and defence where his policies could result in nationalisation and, potentially, the acquisition of businesses at lower values than represented by current share prices. Shares in these companies may underperform should Labour’s campaign go well, and there could be a relief rally if Mr Corbyn is ultimately defeated.
Perhaps the most controversial Labour policy for investors is its Inclusive Ownership Funds proposal, which would require any company with more than 250 employees to transfer 1% of its shares each year into a trust fund for its workforce, up to a total of 10% of the total equity. Each worker’s dividend payment from the fund would be capped at £500 a year, with dividends over that amount diverted to HM government. While there may be legal impediments to the proposals it represents a broad political risk for UK equities.
While most of Labour’s policies are viewed as market unfriendly, the party’s stance on Brexit – a renegotiation followed by a referendum vote on the new deal versus remaining in the EU – may be viewed more positively. In isolation, this policy might see sterling and UK equities perform well as it would suggest a strong possibility of remaining in the EU. However, given the implications of Labour’s domestic policies described above it is hard to envisage an upbeat reaction to Mr Corbyn moving into Downing Street. Gilts (UK government bonds) would also likely struggle given Labour’s hefty borrowing requirements, as well as the inflationary consequences of these combined with a further fall in the pound. Having said that, it’s possible a Labour-led coalition supporting a second referendum but not the more controversial policies affecting business might result in a less negative reaction for UK assets. In addition, Labour’s increased public spending would be supportive of some areas of the economy, though it's worth noting that all the major parties are making spending promises meaning a fiscal boost to some extent whoever wins.
It feels like the wild card in this election is the Liberal Democrats. Whatever happens, the amount of support they garner with their clear but divisive policy of revoking Article 50 to stop Brexit is likely to have a significant influence. They have the potential to take a significant number of marginal seats from both Conservative and Labour as they attract the ‘remainer’ vote from across the political spectrum. Logically, if they were to seize control of parliament (seen as highly unlikely) then the pound and UK equity market could rally as Brexit worry dissipates. However, the opposition in parliament to reneging on the 2016 referendum would likely block that outcome anyway.
Like any short-term political event, the general election is likely to move markets, perhaps by a little, perhaps by a lot – depending on what happens. Much of the reaction could take place in the currency markets with the pound strengthening or weakening depending on how positively investors view the outcome. As we know from the market action following the referendum in 2016, any fall in sterling is likely to lift the share price of multinationals and will be a boost for overseas assets investors hold.
What is positive for the pound would likely also be positive for domestically-orientated UK companies and funds investing in them – especially many smaller companies funds and property-related investments. Overall, we believe these UK domestic assets are cheap. Global investors have increasingly turned their back on the UK stock market for almost three years because Britain’s economic fundamentals and corporate earnings have played second fiddle to the political uncertainty. However, they could become cheaper still before any recovery comes.
During the coming weeks we believe it makes sense to ensure portfolios are sufficiently diversified across different asset types and contain a combination of UK-orientated and overseas facing investments. This will help avoid being too aligned to one outcome or another. We also remain alert to opportunities as they emerge, perhaps due to additional volatility.
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Rob Morgan is Pensions and Investments Analyst at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.