By the end of the week, the results of the most tightly contested UK general election for more than a generation will have been counted and known to all – even if this does not lead to a government being formed immediately.
In contrast, right now most people are agreed that with the polls mostly neck and neck with Labour and Conservatives both on about a third of the votes, the likelihood is another hung parliament leading to some brutal deal making. Even prime minister David Cameron believes the stakes are “on a knife-edge”.
However, the news has not caused much more than a wobble for UK investors with the FTSE 100 down only a few percentage points from its recent all-time high. Given that headwinds such as a potential ‘Grexit’ from the eurozone and disappointing UK data are on the table, the market seems not to be panicking overly.
Performance of index in 2015
Source: FE Analytics
As City Financial investment director Peter Toogood says, it is a challenging vote to predict in terms of who will eventually lead a government and in what format, but that more than likely there will be immediate deadlock.
“It is very difficult for even veteran pollsters or political observers to make a prediction on the outcome of the general election tomorrow with any degree of certainty. This is, of course, partly due to the rise of minor parties’ poll ratings and their unpredictable impact on the main parties’ vote shares in marginal constituencies,” he said.
“Will the Greens take key Labour votes? Or will UKIP take crucial Conservative votes? This lack of certainty is key. The only factor on which we can place a high degree of probability is that no party is likely to achieve an overall majority.”
“More than one ‘minor’ party may very well be needed to support – or at least not to oppose – the next government. This means that, as in 2010, we are likely to enter a period of political limbo as the party leaders try to form a government.”
According to the BBC’s Poll of Polls, the Conservatives have leaped ahead in 2015 to about 34 per cent of the vote compared to 31 per cent in January.
But Ben Willis (pictured), head of research at Whitechurch Securities, thinks a Labour-led coalition is most likely.
“Neither party can form a majority without a coalition and it is going to be very fragile whatever happens. However, the Tories can’t get enough. If you look at traditional battle grounds they can’t strike enough deals with anyone to actually get a majority,” he said.
“As the SNP [Scottish National Party] won’t do a deal with the Tories, they would have to rely on UKIP and maybe the Ulster Unionists or Democratic Unionists, but even with the Lib Dems they won’t get enough seats.”
“The only way it can be done is if Labour, the Lib Dems and the SNP club together and they might have enough seats past the post – but would it work?”
Rowan Dartington Signature’s Guy Stephens agrees, believing markets are already preparing for “mess” in the near term.
He said: “The only likely surprise would be the return of the Tories either in majority, minority or coalition and this would most likely be viewed as a positive event by the markets, due more to the familiarity factor rather than anything else.”
“The downside vulnerability is more likely to occur the following week when all the deal-making jostling will begin if we have a hung parliament. A Tory, Lib-dem, DUP coalition would be easily the most market-friendly outcome, although concerns would then start building with regard to the certainty of an EU referendum and the impact this will have on economic investment in the UK and the value of sterling.”
“Any Labour coalition is going to have to involve the SNP and appears to be a very uncomfortable pairing reigniting the Scottish referendum issue. Indeed, most SNP voters will have switched from Labour but their actions will have resulted in a Labour majority – maybe that is a price worth paying for an element of power and influence in Westminster to promote Scottish interests?”
AXA Wealth head of investing Adrian Lowcock, like many others, says it is very difficult to call but that he believes the Conservatives are most likely to come out of Thursday’s vote ahead.
“It looks like some sort of hung parliament and it may take a while to know the result of. We’ll have quite a bit of uncertainty over the next few weeks if there is a coalition to form. Longer term there could be another election which will introduce a lot of uncertainty into markets,” Lowcock said.
“Ultimately I don’t know but if it is a Conservative-led coalition there will be less volatility as there is more confidence in what they are going to do and generally the City is more Conservative.”
“The Conservatives seem to be ahead now up until recently it looked to be Labour. However, it will all come down to marginal seats.”
FE Trustnet will be covering the reactions and potential outcomes for markets in the coming week or so and how it may affect your portfolio. Stay tuned.