With two weeks to go until the UK goes to the polls, Rebecca O’Keeffe, head of investmentat Interactive Investor, takes a look at implications for markets based around the key scenarios.
Recent opinion polls put the Conservative plus Brexit parties somewhere around 47% support, with Labour circa 29% and the Remain parties around 24%. But even if these numbers could be relied upon to be a true reflection of voting intentions across the country as a whole, the prospects for large regional variations and tactical voting mean that the election outcome is still extremely difficult to call.
There is therefore still a range of potential outcomes that could be delivered on (or after) December 12th.
If there is a majority for the Conservatives, this implies the rapid return of Boris’s Withdrawal Agreement Bill (WAB). The UK equity market would probably take the imminent passage of this bill as a positive, since all Conservative MPs would know they might find themselves in Boris’s eponymous ditch if they didn’t vote for it this time. In this scenario, UK-focused stocks would be likely to do reasonably well, as would sterling, as long as the actual withdrawal was expected to avoid a hard Brexit.
All would not be plain sailing, however, as the market would soon turn its attention to the question of future trade and other arrangements between the EU and the newly independent UK. These really tough negotiations can only begin once the WAB has finally been agreed.
If a Conservative victory came with a customs-union type Brexit, this would probably be modestly positive for UK focused companies, including those in the FTSE-250 or UK smaller companies including AIM. TB Amati UK Smaller Companies Fund and Henderson Smaller Cos Investment Trust may benefit.
It is likely the FTSE-100 wouldn’t do quite as well (in GBP) because of its global nature and the negative correlation between sterling and the value of large global UK-listed stocks.
If a Conservative victory came with a customs-union type Brexit, this would probably be modestly positive for UK focused companies, including those in the FTSE-250 or UK smaller companies including AIM.
A hung parliament is not just one, but many potential outcomes. If things don’t go smoothly for the two major parties, there is every prospect that parties with a clearer Brexit vs Remain message will do well. This appeared to be more of a risk to the Conservatives around the time of the European elections earlier in the year but appears now to be a greater risk to Labour in the current climate.
What might a coalition government look like?
There are three possible coalitions to consider. First, a hard-Brexit alliance of Conservative and Brexit parties. This would undoubtedly get Brexit done, but might also be excruciatingly painful for UK plc if it meant a cleaner break with Europe to satisfy the Brexiteers.
While Johnson and Farage are keen to advocate the same stated aim, their views have diverged markedly since the early Vote Leave campaign. Quite how such a coalition would advance a Withdrawal Agreement Bill and subsequent negotiations with the EU is very hard to call. For example, the ERG might align themselves more closely with Farage’s Brexit Party MPs to pressurise Boris into pursuing a harder Brexit.
Next, a truly No-Overall-Control hung parliament, in which further delay and inability to take any decisions might remain the order of the day. If the only certainty is perpetual procrastination, is that good or bad for UK plc?
Third, a rainbow alliance of pro-Remain parties plus Labour might push through a second people’s vote. This could result in a spectacularly simple resolution of the whole problem, unless of course the people return a similarly narrow majority in favour of Leave.
Very little within these three coalition scenarios looks great, with either a hard Brexit or further Parliamentary paralysis the most likely outcomes.
The potential uncertainty in the event of a hung parliament means that there may be limited good options for UK investors in this scenario. A global fund or trust might be a good option, for example F&C Investment Trust, which has weathered all manner of storms over its 150 plus year history, or Murray International investment trust, which combines growth and income.
Despite Jeremy Corbyn’s Lazarus style recovery in the last election, it would be reasonable to suggest that Labour is very unlikely to get a majority this time around. Such an outcome would therefore be a major shock, causing sterling and UK equities to suffer significant damage.
What to do?
Investors have a choice of individual shares, precious metals, bonds, funds or investment trusts depending on their election view. With a wide range of potential outcomes still a distinct possibility ahead of voting on December 12th the adage caveat emptor is perhaps most appropriate at this stage in the election campaign.
While most investments simply move according to their underlying asset prices, the structure of investment trusts adds an extra layer of potential opportunity or threat. If there is a Conservative victory leading to a moderately sensible Brexit, we may see investment trusts outperforming their underlying holdings – so discounts could narrow or even move to a premium. In the case of a hung Parliament, or a Labour victory, there could be some nasty discounts if market sentiment were to deteriorate sharply.