- If no party gains a majority, the pound will almost certainly weaken and UK shares would underperform overseas stockmarkets
- An increased Conservative majority would boost sterling
- Opportunities to take profits and pick up bargains could emerge from election result
Since the Conservative general election victory in 2015, there has been a general perception that polls are unhelpful in forecasting election results. But that perception is false – polls remain the best means of testing public opinion.
They forecast a result which, because it is based only on a sample of the population, has a margin of error. And, while recent votes may not have been won by the political party ahead in the polls, they were generally within the margin of error.
However, translating share of the vote (which is what polls test for) into an actual election prediction requires complex modelling. In the UK this is a particular challenge because it involves trying to establish how the national swing will affect key constituencies. Incorporating tactical voting into electoral outcomes is also challenging.
Hence making investment decisions based on expected election outcomes is dangerous.
There are a number of election forecasting models in circulation. Two credible – but very different – forecasts come from YouGov and ElectionForecast.co.uk. While YouGov suggests the Conservatives will lose their majority but remain the biggest party in parliament, ElectionForecast.co.uk suggests the government majority will increase by more than 20 seats.
There are many reasons for the polls to be even more unreliable this time. Both the main political parties have dramatically changed policy mixes. The Conservatives won’t rule out raising income tax while Labour is pledging to renationalise some public services. The parties have not been associated with these stances for decades.
Voting complicated by Brexit views
The EU referendum throws another spanner into the works. Just under half the country did not support the decision to leave the EU and may take that into account when deciding who to vote for. The effect of this is difficult to predict.
And one of the biggest differences between the two forecasts is support for UKIP. YouGov sees UKIP support lower and Labour support higher than ElectionForecast.co.uk, though what really matters is the distribution of that support across constituencies.
What would be the market impact of these forecast outcomes? While we took a relatively benign view of the potential for a hung parliament in 2010, we are a bit more concerned about one now.
Back then the three major parties were all broadly economically internationalist and economically liberal in their philosophies, allowing a workable coalition to form quite easily.
This year, in different ways and to different extents, the Conservatives and Labour have eschewed those values. They are much more at odds over social issues and have extremely incompatible economic agendas. And the Liberal Democrats have ruled out a coalition in advance of this election.
If no party wins a majority, the most likely outcomes are another election either immediately or after a short spell of minority government. In either case, negotiating Brexit against a two year deadline would be very challenging. Theresa May’s own position would be precarious and her decision to call an election after triggering Article 50, which saw very little criticism when the Conservatives were heading for a 100 seat majority, would undoubtedly be recast as a catastrophe.
Hung parliament would knock pound
A hung parliament is not our central case, but in this scenario the pound would almost certainly weaken. And weaker sterling, as has been the situation since Brexit, would mean higher prices for UK consumers and so weigh on retail sales.
It would also suppress profits for companies that buy from overseas and sell domestically, which is the position for many retailers. It would mean that multinational companies – which are generally the larger stocks in the market – would outperform smaller companies that tend to be more domestically focused. UK shares would generally underperform overseas stocks.
However, we doubt the market reaction to a hung parliament would be as extreme as when the UK voted to leave the EU last summer. The UK went into last year’s Brexit vote with a reasonably expensive currency whereas now the pound has less far to fall.
Our view: a bigger Conservative majority
We remain of the view that the British public will return the Conservatives to government with an improved majority. By implication this would be taken as a positive for the pound. The extent to which it will bolster the pound will be determined by how pessimistic investors are beforehand. Sterling has fallen about 3% on a trade-weighted basis while the polls have been narrowing.
Notwithstanding the potential market effects, we aren’t adjusting our investment portfolios in advance of the election. We don’t think we can judge the poll outcome better than other market participants, and we generally hold some stocks which could benefit and some which would lose from an indecisive electoral outcome.
As is typically the case with such matters, the opportunities tend to come from reacting to the result by taking some profits and picking up some bargains.
By Guy Foster, Head of Research
Guy leads Brewin Dolphin’s Research team ensuring that a rigorous and exhaustive investment process is employed. He also provides recommendations on tactical investment strategy to Brewin Dolphin’s investment managers and strategic recommendations to the group’s Asset Allocation Committee. Before joining Brewin Dolphin in 2006, Guy was an Investment Director at Hill Martin (Asset Management). Guy has a Masters in Finance from London Business School. He is also a CFA charterholder, holds the CISI Diploma, and is a member of the Society of Business Economists. Guy frequently discusses financial issues with the written and televised media as well as presenting to the staff and clients of Brewin Dolphin.
The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd.
The value of investments can fall and you may get back less than you invested.
The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
Past performance is not a guide to future performance. This information is for illustrative purposes only and is not intended as investment advice.