UK election: what could it mean for the markets?
According to polls, Boris Johnson’s Conservative Party has a comfortable lead going into this week’s general election. It’s worth remembering, however, that Theresa May’s government enjoyed a similar lead over Labour in 2017 and underperformed. This led to a hung parliament, and two more years of unpredictability.
Whatever the outcome, there could be positives and negatives for the economy and the markets.
With the majority required to pass the Brexit withdrawal agreement, the Conservatives plan to move into the EU transition period. This, along with pro-business policies and increased fiscal spending, could be broadly favourable to financial markets according to analysts.
- A measure of clarity on Brexit is likely to boost the property market, leading to an increase in speculative construction projects.
- Brexit clarity, along with proposed tax cuts, may also boost consumer confidence in the run-up to Christmas. Retailer stocks would benefit.
- If the pound continues to rise, this might reap rewards for firms with incomes drawn from the domestic market. This might not, however, be good news for some of the UK’s more internationalised companies, as profits made in foreign currencies, once converted, will be reduced.
- Labour’s promise to rule out a ‘no deal’ Brexit and seek customs union membership might buoy Brexit-sensitive stocks in the manufacturing industry and elsewhere.
- Certain stocks linked to health and social care might enjoy a spike thanks to Labour’s sizeable spending plans in these areas. Labour’s re-nationalisation plan could put utilities, Royal Mail and transport stocks (particularly rail operators) in the firing line, especially if executed at below-market rates.
- Outsourcing firms may expect to see their stocks take a hit, as Labour vows to use their services less and less. Similarly, defence contractors may expect less business from a Labour administration.
- Financial services companies might be vulnerable to any tightening of regulations and higher taxes that a Labour government could bring, with smaller operations least able to weather the storm.
- The upsides to a hung parliament are reasonably negligible for the markets and would depend entirely on the formation of the minority government that could follow. A Remain-based coalition, in removing the risk of a hard Brexit, might boost sterling and Brexit-sensitive macro stocks.
- By contrast, a Conservative minority government propped up by the Brexit Party could see Britain leave the EU on WTO rules. In this scenario we might expect to see steep falls in sterling and Brexit-sensitive stocks.
- The uncertainty that a hung parliament would bring may weaken consumer spending, further diminishing the value of stocks in the retail sector.
- The property market would likely stagnate further, with the ongoing political instability making investors cautious.
Published: 10 December 2019
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