In a further ‘shake-up’ to the political landscape, the UK Independence Party won its second seat in the House of Commons afters voters in the Kent constituency of Rochester and Strood gave former conservative MP Mark Reckless - who defected to UKIP - a majority of 7.3 per cent.
The victory gives UKIP greater credibility as a political force after it won its first seat in Clacton on Sea in a snap by-election in October following the defection of another Conservative MP Douglas Carswell.
Green, founder and chief executive of DeVere, says the rise of UKIP represents an increasing threat to the stability of financial markets due to an interpretation that recent wins increase political risks.
“UKIP gains are changing the political landscape in Britain and these shifts have wider effects than shaking-up British politics; they are likely to spark short-term volatility in financial markets,” Green said.
“Investors would be wise to monitor these potential portfolio risks carefully with their financial adviser,” he added.
Political risk has been one of the dominant themes playing out in financial markets in both the UK and around the world this year.
The run-up to the Scottish independence referendum, while largely forgotten following a victory for the ‘no’ campaign, caused a groundswell of worry for investors, fund managers and business leaders.
The heightened and violent stand-off between Russia and Ukraine has been a further worry for market participants, especially with eurozone interests.
For example, the fall in the MSCI Russia index that has accompanied the crisis has come alongside the torrid performance of the European index.
Performance of indices in 2014
Source: FE Analytics
The Ebola virus in West Africa and the rise of Islamic State in Iraq and Syria has also created the potential for escalating crises in markets already beset with a host of economic headwinds.
Green says UKIP’s recent gains are most likely to knock back markets because it raises the spectre that the UK may leave the European Union, or at the very least force markets to price in such an eventuality.
“The predicted market volatility until the next election and beyond will be driven by unsettled investors who are expressing uncertainty about the increasing chances of Brexit [a British exit from the EU], which could trigger massive disruption,” he said.
“It can be expected that the election campaign will bolster the chances of Brexit due to the possible defection of more MPs to UKIP and the wider growing Eurosceptic sentiment in the UK – which David Cameron appears to be trying to fight by considering policies that could force the UK out of the EU and by the promise of an in/out referendum by the end of 2017.”
Aside from this Green says the likelihood of a more fractious political landscape will be interpreted unfavourably by financial markets.
“UKIP’s victories are significant as they are dividing the vote of the main political parties, boosting the possibility of a hung parliament and a weaker government.”
FE Alpha Manager Jan Luthman (pictured), in a recent article for FE Trustnet, also said stock markets were at greater risk of sell-offs in the run-up to the election.
“The sensitivity of the stock market to political interference is only likely to increase as we edge towards the election, especially as the decline of the Liberal Democrats as a viable coalition partner has raised the likelihood of an ineffectual government lacking sufficient majority,” he said. Former CF Miton Special Situations manager James Sullivan, who has recently launched a fund management business within RC Brown Investment Management, also told FE Trustnet there was an increasing risk to financial markets following the rise of more fringe parties across the eurozone.
Andrew Herberts, head of private investment management at Thomas Miller Investment, says worries around political uncertainty were also spreading into emerging markets.
“Geo-political risk has risen through 2014. Most pertinent remains the Russia/Ukraine problems and the potential issues around energy supply into the region and further into Europe. There remains risk that any disruption could adversely affect European recovery and therefore impact global demand and GDP,” he said.
