The votes are counted and the results known: the United Kingdom has handed David Cameron’s Conservative Party a narrow majority.
Nearly all the polls leading up to the vote suggested a hung parliament and, as a result, the prospect of a prolonged period of political uncertainty meant that sentiment to nearly all UK related assets had begun to weaken.
Nevertheless, to the surprise of many shadow chancellor Ed Balls lost his seat and Ed Milliband is to step down as party leader in what was a fairly disastrous night for Labour. Other casualties of the Labour top brass include Jim Murphy and campaign leader Douglas Alexander.
A landslide win for the SNP was mirrored by a torrid result for the Liberal Democrats with Nick Clegg’s party expected to lose close to 50 seats.
Nigel Farage has also lost his bid in Thanet South and most likely will step down as head of UKIP.
However, the decisive victory for Cameron is clear and markets appear to have cheered the news with the FTSE 100 rocketing up and sterling rallying but from an investment point of view there are some clear concerns.
Neil Woodford (pictured), head of investment at Woodford Investment Management, and an FE Alpha Manager says the results were a shock but positively so, although a Tory win has opened up a Pandora’s box in the shape of a referendum on the UK’s membership of the European Union.
“The result of the election looks much better than expected – that isn’t a politically inspired statement but one that is based on the fact that such a decisive result removes the risk of the prolonged period of political uncertainty that we had expected to prevail.”
“That is reflected in the surge in the pound that greeted the BBC exit poll which provided the first indication of such a strong conservative showing and the positive opening for UK equity markets this morning."
“Nevertheless, it certainly doesn’t remove all of the political uncertainty. The performance of the Scottish Nationalist Party gives them a significant voice in parliament but no power.”
He adds that about the Union as well as the very likely prospect of a referendum on Britain’s membership of the European Union in 2017.
Chris Beauchamp, senior market analyst at IG says market jitters could be ahead as markets become more conscious of an in/out referendum.
“When the exit poll was released last night we saw a spike higher in the pound and FTSE futures as well, with the former moving back to $1.54 and the latter pushing higher from last night’s close. As David Cameron is set to retain the keys to No. 10, with an increased number of Conservative MPs, the way ahead in economic policy terms looks very much like ‘steady as she goes’, especially since they look likely to govern alone.”
“For investors, the results from last night mean that they can cease worrying about the UK economy, and focus on the other areas of concern, like Greece and whether the Fed will hike rates this year."
"We have yet to see any realisation among traders that the Conservatives’ victory makes an EU referendum almost certain.”
“A majority Tory government would allow the vote to proceed, which will likely lead to market jitters, both in FX and in key FTSE sectors such as banks and major financial firms, who have already warned about the impact of a popular vote on the UK economy.”
“However, this appears to be a question for another time. With US job numbers on the calendar for today, it may be that the UK election result disappears from the radar screen much sooner than expected.”
Because of this DeVere Group’s chief executive Nigel Green, urges UK investors’ urges to invest overseas.
‘Now is the time to think more globally. I suspect David Cameron’s slender majority in the Commons outcome will be met with an immediate sigh of relief by investors,” he said.
“However, this might be the calm before the storm. The prospect of an in-out referendum of Britain’s EU membership has gone from risk to a reality.”
“Since this is likely to take place in several years’ time, this could lead to numerous years of ongoing uncertainty – something the markets are allergic to – and, in response, investors need to take precautions against a fall in the value of UK assets. They can do this by increasing their exposure to overseas investments”.
Dominic Rossi, global chief investment officer of equities at Fidelity says there is no immediate threat posed by 2017 vote and investors can expect the FTSE 100 to continue to rally.
“Whilst the constitutional issues raised by the election result will cast a shadow over Westminster, markets will be relieved that a likely conservative majority will continue with its fiscal consolidation policies combined with a competitive corporate tax policy. We expect equity markets and the FTSE 100, which surpassed a record high in April, to continue to trend upwards,” he said
Star UK large cap manager Richard Buxton (pictured), who manages the Old Mutual UK Alpha fund, as well as being head of UK equities at Old Mutual Global Investors, says the election result was a positive for the UK economy, but “not a good day for the United Kingdom.”
“It is clearly positive that we do not have to undergo days of uncertainty whilst a coalition Government is negotiated. A clear mandate to govern for the next five years is constructive, whilst the narrowness of the majority guards against extreme policies,” Buxton said.
“The immediate reactions are obvious: slightly firmer Sterling and an equity mark-up, led by potential losers from a Labour Government – utilities, bookmakers, banks and house builders.”
“To the extent that stronger Sterling represents a policy tightening and, more importantly, that the Government will remain determined to try to rein in the Budget deficit means that the Bank of England will be in no rush to raise interest rates.”
“If there is some modest evidence that pre-Election uncertainty held back activity in the UK through the first months of the year, then we would expect some rebound in the economy through the remainder of the year.”
However, he warns that the vote has highlighted the level of division of the UK’s electorate.
“So a positive outcome for the UK economy, where the reality is that we have further work to do to reduce our indebtedness and overspending. A growing economy should enable that progress to be made. But a country most certainly not ‘at ease with itself’, in Sir John Major’s words. There is much healing work to be done.”
“The scale of the Scottish National Party’s victory in Scotland, though, together with the scale of UKIP’s share of the national vote (at over 12 per cent), confirms the extent to which we are an increasingly divided nation."
“The Scottish issue – and, inextricably linked, the English issue – is not going away as many hoped after the Scottish referendum, but will be a feature of the political landscape throughout the five years of the Parliament. This may not be entirely positive for the Scottish economy.”
On the prospect of An EU referendum bout of uncertainty, he says investors shouldn’t panic as two years of negations should eke out the issue gradually with the bloc’s top power Germany keen to keep Britain as a member and therefore receptive to Cameron’s desire for ‘a better deal.
“As for the markets, within days if not hours this result will be old news. Back to the real issues of watching the Fed attempting the near-impossible task of gently nudging long yields and short rates higher, without damaging economic activity or precipitating a bond market collapse,” Buxton added.
Toby Nangle, head of multi asset at Columbia Threadneedle, says he will continue with an overweight to UK equities in asset allocation portfolios as a result with the prospects for sterling as well as gilts also looking good.
“Equity strength is being led by stocks that investors expected to be squeezed by Labour - the banks, government contractors, and the bus, train and utility companies whose businesses depends on terms that are set largely by Westminster,” he said.
“Gilts are rallying on the prospect of a pick-up in the pace of fiscal austerity which will squeeze the economy, and in so doing push back expectations of rate rises by the Bank of England.”
“Initial Sterling strength has been informed by the lack of short-term uncertainty over government coalition negotiations. The risks that come with a Conservative victory (in the form of further referenda) appear to be a little too distant to make their way into currency traders' calculus.”