Is This the Most Important UK Election for Investors in 30 Years?Oct 31, 2019

 

Investors are likely to be following the course of the current UK election campaign more closely than usual, according to Franklin UK Equity Team’s Colin Morton. He runs through the possible scenarios, offering his take on the likely market reaction.

Traditionally, investors in the United Kingdom haven’t paid much heed to the outcome of domestic elections. While the wise Sir John Templeton once said the four most dangerous words in investing are “this time it’s different”, we’d suggest that this time—at least in the UK—it really is different, because the stakes are much higher. We think this election is important—not just in the short term, but in the medium term as well.

For the last 30 years or so, UK investors have largely been able to rise above party politics: the parties competing in the general elections have generally coalesced around the middle ground politically—either centre-left or centre-right. They haven’t typically proposed radical policies that would upset markets.

That’s not the case this time. The Labour Party under Jeremy Corbyn has signalled its intention to pursue a genuinely radical agenda that could have a significant impact on the UK’s equity markets.

We’re not in the business of offering political commentary. However, our years of investment experience have given us some insight into how markets might respond to the possible scenarios ahead.

A Quick Solution to Brexit?

In our analysis, UK equity markets would likely react most positively in the short term to a victory for the Conservative Party. We’d expect a majority Conservative government to quickly push the Brexit Withdrawal Agreement Bill through the Houses of Parliaments and move on to the next stage of the trade negotiations with the European Union (EU).

The above scenario would remove much of the uncertainty that’s been weighing on investor sentiment and we’d expect sterling to rally and UK domestic oriented stocks to do well.

The other outcomes—a hung parliament or a majority Labour government—might bring positives further down the line, particularly if they eventually bring more money into the economy. But they would likely present short-term concerns for markets.

Labour’s Radical Agenda

From the market’s perspective, the positive aspect of a Labour government would be the likelihood of a softer Brexit—or even no Brexit at all.

However, the Labour Party’s radical agenda of renationalisation, higher spending and higher corporation tax would likely spook markets.

We’re sceptical about any UK government’s ability to carry out such a programme of utility renationalisation in the short or even medium term, given how international investors as well as pension funds widely own these stocks.

However, the fear in the market could cause some price volatility. UK domestically orientated stocks would likely come under pressure, and we’d expect to see sterling decline in the face of Labour’s higher spending plans.

In that environment, large-cap UK-listed internationals with less exposure to the UK might become more attractive to investors, especially international investors.

Conservatives Isolated

If the Conservatives fail to win a majority, it’s hard to see how they could form a government as nearly all the other parties have ruled out supporting another minority Conservative administration.

So even if the Labour Party were to win fewer seats than the Conservatives, it might be able to form a minority government in a loose arrangement with other opposition parties, including the Scottish National Party (SNP) and possibly the Liberal Democrats (Lib Dems).

The Lib Dems price for that support would likely be a second EU referendum, and the SNP is pushing for another vote on Scottish independence. Uncertainty would likely continue, and we think markets would reflect that with a substantial sell-off in the short term.

However, we think the Lib Dems and SNP would likely limit some of the more radical ambitions of the Labour Party, resulting in a more muted agenda. Still, in the short term, we think sterling could weaken and prices of UK-listed utilities and domestic stocks would likely fall.

Our Nimble Approach

In the face of these unpredictable outcomes, we want to remain nimble and ready to take advantage of any opportunities in the possible post-election dislocation.

If the outcome is anything other than a Conservative majority, we’d expect the price of many stocks to drop. We would assess whether we felt any kneejerk reaction was too negative, and look for potential opportunities to buy high-quality companies at attractive prices.

Based on current opinion polls, we believe a majority Labour government seems the least likely of the three viable scenarios: Conservative majority, hung parliament or Labour majority. But, we consider it could have the greatest impact on markets.

Important Information

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information, and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

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