The Brexit Party’s decision not to contest seats won by Theresa May in 2017 could turn out to have been something of a watershed, and one that markets and the pound seem to have quite liked so far.
One thing we have learned since 2010 though is that UK general elections can be unpredictable affairs. From the 2010 poll that was expected to deliver a majority for the Conservatives, but which actually produced a coalition, to a calculated attempt by the government in 2017 to capitalise on an incorrect assumption of catastrophic Labour weakness, voters have repeatedly defied the polls and market expectations.
Next month’s election will be the fourth such event since the onset of the global financial crisis in 2008. Just as that crisis changed the economic landscape for a generation, so it gave birth to a lasting groundswell of discontent with the political status quo.
Thus, it may be no coincidence that successive British governments since 2010 have trodden a path from austerity under Chancellor Osborne, via the “balanced approach” of Chancellor Hammond to a decidedly more relaxed attitude to spending under Chancellor Javid.
However, Britain has yet to see a government put into practice populist spending plans this millennium quite like those currently proposed by either of the two main political parties.
According to statements made this month, spending under either the Conservatives or Labour is set to rise significantly after this election – to the tune of £20 billion or £55 billion per annum respectively. Both increases, according to the IFS, would – along with recent accounting changes – contribute to a forecast budget surplus for the UK in 2022-23 being wiped out1.
In effect, that puts the final nail in the coffin of former chancellor Phillip Hammond’s desire to maintain a Brexit war-chest. It also poses stiff challenges to both parties to uphold pledges not to spend more than the Treasury receives day-to-day, based on three and five-year time horizons.
A couple of other things have become clearer recently too. A shakeup for the railways of some kind seems likely whichever party prevails2. Moreover, environmental policies look set to feature more heavily than ever before, with a fracking moratorium declared two weeks ago being the first real shot fired.
Naturally, the extra spending proposed by both main parties stands to boost demand in the economy and where, exactly, is an issue set to interest investors.
Labour’s policies appear directed at redressing the effects of the policy responses to the financial crisis, which largely favoured the owners of assets, leaving the less well off trailing. Meanwhile, the Conservatives seem set on finally breaking the chains of austerity and spending upfront a proportion of the Brexit dividend they anticipate is achievable.
However, the most plausible election outcomes – a minority Conservative government; a Conservative government with a slim majority; or a coalition led by Jeremy Corbyn’s Labour Party – mean that, while both parties may have vastly differing policy intentions, they may well also end up with a very limited mandate to exercise them.
Even so, health, education and social care look set to be in the front line for extra spending, with Labour currently promising to spend an extra £26 billion on the NHS over four years – more than the Conservatives3. Winners from that ought to be providers of products and services to schools and hospitals, as well as care homes.
What utilities fear most is nationalisation under a Labour government. The possibility of nationalisation is probably at least partly factored in to the current valuations of energy, rail and water companies, even Royal Mail. So, for them, the outcome of this election will be key to how their valuations progress from here, as well as the prospects for investors who look to them for a dividend income.
Broadly, a clear win for the incumbent government would most probably lift the pound and, by association, companies exposed primarily to the UK’s domestic economy. House builders and domestic banks, retailers and leisure companies ought to respond positively under this kind of scenario. The reverse might be true were another hung parliament or Labour-led government to prevail.
A risk that’s hard to quantify is the possibility a Labour government would enact plans to insist companies with more than 250 employees hand over 10% of their shares to their staff4. However, it seems likely that, not only would this have a material effect on existing shareholders straight away, it would also raise doubts over shareholders rights over the longer term and likely be a depressant on share prices generally.
So this general election, though billed by the prime minister as the means to unblock parliament and enable Brexit, has the potential to do nothing of the sort, with possibly seismic meanings for the economy and markets.
In this environment, it’s probably inadvisable for UK investors to bet on one outcome or another by focusing on one particular area of the stock market. The election result is very likely to move sterling, with differing implications for domestically oriented companies or exporters.
What’s more, companies likely to be under fire from Labour’s more radical proposals could flounder in the event the government fails to achieve its objective or prosper in the event this election sees those risks recede.
Investors looking to the longer term may be encouraged by an economic outlook that is not as dire as it is sometimes depicted to be. Data released this week showed that wages continue to rise above inflation as unemployment remains historically low5. There’s no fundamental reason why the modest valuation of the stock market crystallised in the face of Brexit and election risks should last forever.
1 Institute for Fiscal Studies, 08.11.19
2 Conservatives.com, November 2019
3 The Independent, 13.11.19
4 The Times, 20.05.19
5 ONS, 12.11.19
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