UK General Election – Market Expectations

We live in uncertain times. With just two days to go before the General Election, the polls are divided in respect of the likely outcome, with latest predictions ranging from a comfortable Conservative win to a hung parliament or even an outside chance of a shock Labour victory. When the Prime Minister called the snap election on 18 April, some commentators speculated that the margin of victory could have rivalled the landslide of 1983 in the aftermath of the Falklands conflict. This would have given Mrs May the strongest hand to deal with Brexit negotiations, one of the greatest challenges faced by any UK government in living memory.

This now looks unlikely following a poor Conservative campaign, which has failed to frame the election in terms of a choice about Brexit with a clear vision for Britain outside the EU, showcase Theresa May as a good leader for the country in comparison with Jeremy Corbyn, and demonstrate why the status quo (‘strong and stable’) is preferable to the change promised by Labour.

The Conservatives have blundered with an abrupt U-turn on social care policy, dubbed ‘dementia tax’ by critics and angered supporters by adopting some of the discredited proposals of Ed Miliband, such as intervening in energy and telecommunications markets and including worker representatives on company boards. In addition, Mrs May has appeared brittle at times, refusing to take part in a leaders’ television debate. Tory support for business has been undermined with a commitment to reduce net migration to ‘tens of thousands’ threatening the UK’s flexible labour market and economic growth. Mrs May’s apparent ambivalence towards a liberal agenda of private enterprise, free trade and open markets is as much a concern for investors as voters on Thursday.

Not that Corbyn’s Labour Party offers a more attractive vision for markets. Whilst Labour’s manifesto appeals to students with a proposal to abolish tuition fees and the pledge to end austerity with higher public spending strikes a chord with some voters, Paul Johnson of the Institute of Fiscal Studies (IFS) noted that Labour’s manifesto spending plans are impossible to cost. More worryingly, Mr Corbyn has spent his entire political career on the political fringes in opposition, buoyed up by the trade unions with no experience or credible understanding of economic issues.

In terms of market expectations for Thursday, with the economic health of the UK deteriorating following recent weak business surveys and falling consumer spending, the new prime minister needs a solid parliamentary majority to enter Brexit negotiations and secure a fair deal with the EU. A majority of under 30 seats for Mrs May could make her vulnerable to the influence of hard Brexiteers, whilst a majority of 50+ seats should provide a wider margin of safety and secure Mrs May’s position. On the other hand, a hung parliament or shock Labour win would likely spook markets at least in the short-term, which would need prompt reassurance in respect of stable and strong government.

Over the next couple of days, we will continue to monitor political and market developments closely. As well as the FTSE-100 and FTSE-250, the trajectory of sterling will be significant to gauge the reaction of international investors in the confidence of the British economy and political stability. The pound has been trading just below 1.30 against the US dollar for some time, any move in either direction is likely to be significant for UK equities and the wider domestic economy as it impacts the cost of imports and exported goods.

In conclusion, Thursday’s General Election is very important for Britain’s future prosperity and role in the world. Geopolitical uncertainty has rarely been greater – a combination of unpredictable US foreign policy, European disarray, Russian and North Korean aggression, as well as a chaotic political situation in the Middle East overlaid with global terrorism to name but a few of the concerns. In addition, a combination of Trump’s erratic diplomacy and Brexit may result in greater EU unity, none of which may be good news for the UK. Markets will be looking for a clear vision from the new prime minister on Friday and reassurance that Brexit will be delivered efficiently, balancing an ambitious economic agenda with social justice. This should enable the UK to play a constructive role in world affairs supporting free trade, private enterprise and a prosperous society.

Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk

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