UK General Election: what to look for

With the UK General Election fast approaching on Thursday June 8th, what are the key issues for investors? And, in the case of a shock election outcome, what would be the implications for financial markets?

The 2015 General Election offers a useful illustration. At that time, the outcome of a Conservative victory and a collapse in the Liberal Democrat vote caught most by surprise. Indeed, the markets were expecting another coalition Government, while social media was both hoping for - and expecting - a Labour victory. Afterwards, the latter was seen as reinforcing the echo chamber of social media, and why it is not the best guide to predicting outcomes.

Note where the Conservatives campaign, not just what they say

Meanwhile, it only emerged after the 2015 election that the Conservative Party had been far more confident of victory than was realised. It also has one important lesson for trying to predict this election: watch where they campaign, do not just listen to what they say.

For during the campaign, David Cameron, the then Conservative leader, and other senior party politicians targeted and visited Liberal Democrat-held seats. At the time, this was criticised by sections of the media but clearly proved spot on. This time, where the Prime Minister Theresa May and other senior Conservatives visit will give us a clear guide as to how they think their private polling numbers are going.

So far, visiting very safe Labour seats suggests they anticipate a substantial victory. A noticeable change in where they target in the next two weeks may indicate a slight shift in expectations. The U-turn over the unpopular manifesto pledge regarding the cost of social care for the elderly suggests they are sensitive to any shifts.

How will the major parties perform?

A BBC survey based on results of the local elections on 5th May suggested that, if repeated, in a General Election the Conservatives would gain 38% of the vote, Labour 27%, Liberal Democrats 18% and UKIP 5%. This would translate into a 50 seat majority for Theresa May. When Parliament was dissolved her majority was 17. Of course, opinions vary as to what would represent a good or bad performance by the major parties. However, a 50 seat Conservative win would be seen as at the lower end of expectations. It has frequently been said that an 80 seat overall majority would be viewed as a good result for Theresa May. That would translate into 400 seats. But who knows what will be the outcome?

The effect changing voting patterns could have

Focusing on the two main parties, in 2015 the Conservatives secured 331 seats on 36.9% of the vote, while Labour won 232 seats with 30.4%. However, much depends on how votes are spread across all parties. In that election, only 67% of voters chose the Conservatives or Labour. Back in 1970 the two main parties received 89.5% of votes. Since then, voters have started to choose other parties, whether regional parties in Scotland, Northern Ireland and Wales, or the Liberal Democrats and more recently, UKIP.

Thus, if there is a loss of support for the Liberal Democrats, UKIP or the SNP, then we could see a greater share of votes being won by the two main parties. If this happens, then it is possible, albeit unlikely, a surprise outcome could occur. That is because a direct swing from Conservative to Labour, or vice versa, rather than a decision to vote for one of the other parties can have a more profound effect on the result.

In recent years, it has been claimed that election campaigns do not radically change the election outcome and that people have already made their minds up long beforehand. That may be true, but sometimes elections have seen major voting shifts. In 1970, for instance, Labour Prime Minister Harold Wilson was around 14 points ahead the weekend before the vote, but the Conservatives won. Plus, in 1992, the polls shifted considerably in the last ten days, away from what would have been a Labour victory to the re-election of Conservative Prime Minister John Major.

Policy implications for markets: Brexit

There are two distinct, albeit overlapping, policy areas that markets will focus on: Brexit strategy and domestic policy. The markets are probably right to assume a Conservative victory. And in that respect what is written in the manifesto carries significance, as convention is that the House of Lords, where the Conservatives do not have an overall majority, cannot prevent policies from the manifesto from becoming law. This could be particularly significant regarding the new Government’s policy towards Brexit.

The Conservatives have reaffirmed the Prime Minister’s pre-election message: the UK will leave both the Single Market and the Customs Union, while seeking a comprehensive trade deal.  This keeps open the possibility of the UK walking away without a deal, although a more likely outcome is a deal, plus a transitional arrangement.

Labour is far more nuanced on Brexit; they will still leave, although the future relationship would be significantly different, and would likely evolve into one similar to Norway. When it comes to domestic policies, it is important how much of a shift has been evident in this campaign.

What could spook financial markets

The Labour manifesto is geared towards far more state intervention and nationalisation, such as the renationalisation of the railways and the Post Office. It is hard to argue with increased Government spending to invest, but it is the scale of it, and the way it is financed that may spook the gilt market - at least to begin with - were Labour to win. Meanwhile the Conservatives, too, have put forward the case for more state intervention. Some policies, such as price caps on energy bills, have been criticised by market participants, while others such as a greater focus on regional policy should be welcome from a macro-economic perspective.

What to expect after the election

Within the first two weeks of the new Government, there will be:

- A Cabinet reshuffle, where the key question is, will the Chancellor or any other of the big posts change and if so, what will that signal?

- The new Parliament will be summoned to meet on June 13th and, on June 19th the Queen's speech will outline how ambitious the legislative agenda is, and how radical the new Government intends to be.

- Brexit negotiations will start around June 15th. Recent leaks reveal that the main EU negotiators have been surprised by the resolve on the UK side to push through with Brexit.

We began this piece by saying the lesson of the 2015 election was to watch where politicians visit, as well as listen to what they say. Similarly, the financial market lesson - as always - will be, once the winner is announced, watch what they do as well as listen to what they say!

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