With Election Day almost upon us, you may be wondering how all the political uncertainty will affect your portfolio going into the new decade. Polls suggest that Prime Minister Boris Johnson’s Conservative Party will secure a majority come the morning of December 13th. However, it is entirely fair to be sceptical of polling, given recent history. I won’t make any attempt to predict the election results. Instead, I’m going to look at a number of scenarios and the ramifications I think the stock market might feel going forward.
Conservative majority
As mentioned, this is currently the outcome that is considered to be most likely, given the polling data. The Conservatives are polling at 43%, up from 38% on the day the election was called. This is a marked difference to the last election in 2017, when the Theresa May-led Tories experienced a collapse in support, forcing her to make a deal with the Northern Irish Democratic Unionist Party.
If Johnson does manage to secure his majority, the initial market reaction is expected to be positive. True, the long-run economic impacts of Brexit are estimated to be severe, but at this point, British stocks have had to contend with a tremendous amount of uncertainty. This uncertainty will be alleviated if the Conservatives get the green light to implement their Brexit deal.
Labour majority/Remain coalition government
A core weakness of the Remain coalition has been infighting and an inability to compromise. The UK’s first-past-the-post voting system means that candidates can win with just one vote, meaning that candidates with similar platforms end up cannibalising each other’s support. Recognising this, Nigel Farage’s Brexit Party pledged not to run against Conservative candidates in marginal seats. The Remain coalition has not demonstrated similar resolve — with only a few of the smaller parties pledging not to run against one another. The Labour party has not taken any official steps towards compromise with other Remain parties. The road to victory for Remain lies through tactical voting.
In the event of a surprise Labour victory, or more likely, a Labour-led coalition government, the initial market reaction is likely to be negative. There are two reasons for this. Firstly, Opposition Leader Jeremy Corbyn is perceived to be anti-business and in particular anti-finance. His strong pro-nationalisation stance is likely to spook many investors — indeed, his party has already called for the nationalisation of BT Broadband. That said, a coalition with a significant mix of Liberal Democrats could probably rein-in some of Labour’s more extreme policies.
Secondly, this outcome would create additional uncertainty surrounding the Brexit process, as it is not clear what the next step would be — a second referendum, a unilateral revocation of Article 50, or something else entirely.
Hung parliament
In terms of probability, this scenario lies somewhere between the two already discussed. I think this would be the worst outcome for investors — it throws the Brexit process into further uncertainty, and offers no clear resolution to the impasse. In fact, short of another election, and another Brexit deadline extension, I see no other resolution to this scenario. Expect stocks to perform poorly if this happens.
