May’s Snap General Election: the Impact for Investors
In recent history, polls have not always been the best guide to election outcomes, as seen with the previous General Election in 2015, last year’s EU Referendum and the US Presidential Election. Unexpected events can serve to change the anticipated outcome of elections. Thus, there is always uncertainty associated with them.
That being said, the polls suggest the Conservatives will be re-elected with a very large majority. The latest YouGov/The Times poll was not unrepresentative of others and showed: Conservatives on 44%, Labour on 23%, Liberal Democrats on 12% and UKIP on 10%.
As the smaller parties receive more coverage they may gain support, and this will likely include the Lib Dems. They, additionally, may benefit from being the anti-Brexit party.
Could this augur a Conservative landslide?
Since the announcement on Tuesday, it has the feel of 1983 – when Margaret Thatcher’s Conservative Government won a decisive victory, or Tony Blair’s landside Labour election win of 1997 - about it. In 1983 the outcome was: Conservatives 42.4% and 397 seats: Labour 27.6% and 209 seats; Liberals 25.4% and 23 seats. In 1997 it was: Lab 43.2% and 418 seats; Cons 30.7%, 165 seats; Lib Dems 16.8%, 46 seats.
Most recently, at the 2015 election the results were Conservatives 36.8% and 330 seats; Labour 30.5% and 232; SNP 4.7% and 56; Lib Dems 7.9% and 8 seats. UKIP won 12.7% of the vote and only 1 seat.
Polls also show Labour's policies in some areas are very popular with the public but their leadership, under Jeremy Corbyn, is not. Labour has made it clear already this week that they will challenge the domestic economic agenda. Meanwhile, the Liberal Democrats are seen as being prepared for an election - and will be strongly anti Brexit. UKIP are second in many seats and this adds to uncertainty. While in Scotland, the question is whether the SNP can do as well as two years ago and, if they can't, what will be the implications for the future referendum debate there.
A mandate for May’s domestic agenda, not just Brexit
If the polls are correct, this will give the Prime Minister a very strong mandate for both her domestic agenda as well as for her Brexit agenda. It is important for investors and savers to recognise this. Even though the focus may be Brexit, we need to factor in her domestic agenda for the longer-term outlook and for our portfolios. There may be limited immediate change on tax given the still large budget deficit, but one would expect a greater focus on boosting domestic demand and future trade potential after leaving the EU. Domestic UK assets would benefit from a stronger domestic economy but may not reflect this just yet.
The impact for Brexit
In terms of Brexit, one would expect the Conservative Party manifesto to reiterate the message outlined by the Prime Minister in her Lancaster House speech and Article 50 letter. Meanwhile, the markets will focus on whether more detail is forthcoming during the election campaign. This is a Clean Brexit with the focus, then, on a comprehensive free trade agreement with the EU.
The one thing is this election - if won by the Conservatives - provides more scope for a transitional deal, as the next election will likely be 2022 and not 2020 as previously thought. Financial markets will like that.
The outlook for sterling
The fall in sterling since last summer appeared justified, given the large current account deficit and the uncertainty associated with leaving the EU added to this. That being said, a solid performance by exporters, plus many firms announcing new investment into the UK, helped convince the market had found an attractive level. More recently, a combination of upward revisions for UK growth - the latest being from the IMF this week for 2017 - has led to a change in sentiment towards sterling.
In some respects we anticipated this, increasing the weight of sterling versus the euro in our portfolios last month. We had seen the downside for sterling as limited. The question - and the risk - is that the market pushes sterling even stronger in the near term.
Could an increased Conservative majority mean a ‘softer Brexit’?
One reason behind this is this perception that an increased Conservative majority will not only strengthen the PM's hand but also point to a ‘softer Brexit’ by making her less beholden to Euro-sceptics in her party. That may be a premature conclusion, especially as one of the reasons suggested for why the PM called a snap election was to stop her Brexit negotiations and Great Repeal Act being blocked by those who wanted to remain. All this is a few months away before being realised. Until then, the current mindset of the market is that a solid Conservative lead is sterling friendly.
Indeed, a solid government victory would normally be seen as positive for sterling.
The likelihood is that victory will strengthen the PM's position as it means policy cannot be blocked at home and Brussels cannot try and feed into a domestic blocking agenda. It does not make the EU any more conciliatory and so we should still expect uncertainty.
Can we trust the polls?
Finally, pollsters have been hopelessly wrong recently, so there is something rather strange about everyone trusting the recent opinion polls as an accurate guide to voting intentions. Nonetheless, they do, and markets will likely follow the gyrations of the polls.
While it is the longer-term impact on growth and performance that we try and take into account for our portfolios, we are also mindful of any impact on monetary policy. The election itself should not directly impact UK monetary policy, but if the result led to a stronger pound and to a greater future commitment to reduce the budget deficit then rates would likely stay lower for longer.