Markets shrug off UK election results
Max King, portfolio manager, shares his thoughts on how markets are likely to react to the UK elections.
The media may have been in a frenzy of excitement about a “knife-edge” election, but financial markets weren’t. The stability of gilt markets and the firm trend of sterling clearly indicated government continuity; given that sterling has been devalued in each of the last five periods of Labour government, sterling weakness would have signalled an expectation of change. As usual, the markets were right and the pundits, who have a vested interest in propagating a “knife-edge” outcome, were a long way off the mark. The betting markets were closer to the electoral outcome but were still some way short of the actual result. That’s because political betting markets are like the betting odds for the Grand National; prices are distorted by naïve and emotional punters.
Since the result was well discounted in financial markets, its consequences should be minimal. Sterling looks about fairly valued, gilt yields are reasonable in relation to both European and US Treasury yields and whether equities are fully or reasonably priced depends on whether or not growth in corporate earnings picks up. With economic growth both in the UK and globally likely to pick up after a slow start to 2015 and profitability sustainable, investors have rightly given equity markets the benefit of the doubt.
There was never going to be an overall impact on the UK equity market. A Labour victory would have harmed some domestically-orientated companies but would have benefited those with significant overseas earnings, who could look forward to weaker sterling boosting the translation of earnings. The UK is about a third of the European market so the impact on European markets would have been even less. The probability of a referendum on the UK’s position in the EU has risen but that is not a risk to markets. Britain’s relationship with the EU is a long-term running sore that needs at least treatment if not resolution. Stopping the referendum would have just perpetuated the uncertainty. Anyway, there is mutual advantage in the UK and the rest of the EU resolving the issue amicably in the interests of all parties and Mr Jean-Claude Juncker, President of the European Commission, has indicated a willingness to be accommodative.
Continuity, however, is not without its problems. The Conservatives, like all parties, made a lot of unwise commitments during the election which they will swiftly regret. The constraint of the Liberal Democrats may have gone but they will instead be at the mercy of their own backbenchers, of by-election losses and of the SNP. The EU referendum will be a divisive issue and the issue of Scottish home rule will be a running sore.
In due course, mistakes will be made, unexpected events will happen and the economy will veer off course. Instability and uncertainty will return, just as it did after the Conservative’s narrow victory in 1992. David Cameron and the electorate may soon grow nostalgic for the days of coalition. Then everyone will understand why Mr Cameron has pledged not to fight a third election.
