Banks prompt asset review in light of UK general election

The outcome of the UK general election on 7 May is impossible to predict. The dominance of the Conservative and Labour parties has been threatened by the rise of the anti-EU UKIP, the Scottish National Party and the Greens, while the Liberal Democrats are expected to perform badly following their spell as a partner in the coalition government. 

Most polls predict a hung parliament and the formation of another coalition, still something of a rarity in British politics, although the vagaries of the country’s ‘first past the post system’ mean there is no guarantee the smaller parties will see their improving support turn into parliamentary seats. 

“A minority government will heighten uncertainty over how successful the government will be in pursuing its policy agenda and how long the next parliament will last,” says Bill O’Neill, head of Investment Office UK, at UBS Wealth Management. He predicts this will lead to higher risk premium for UK assets and an “uncomfortable increase in volatility,” with markets concerned by a possible referendum on EU membership, the direction of fiscal policy and a second vote on Scottish independence. 

No matter who leads the next government, the result is likely to be negative for equities, says Frédérique Carrier, director of the portfolio advisory group at RBC Wealth Management, warning that markets have not yet taken this into account. 

The Conservatives are widely perceived as being the most pro-business party, but are committed to holding an in/out referendum on the UK’s membership of the UK, which is a worry given 50 per cent of UK exports are to the eurozone. “Broadly speaking a UK exit would be negative for the economy and for the stockmarket,” she believes.

On the other hand the Labour party is seen as a safer bet on Europe, but less business friendly. “Labour has talked about increasing the minimum wage and restricting zero hours contracts,” says Ms Carrier. “Combined these measures would be negative for labour-intensive industries.”

Given these uncertainties, RBC recommends clients review their positions in UK companies with heavy eurozone exposure, should the prospect of a referendum come any closer. “On the other hand, if volatility increases in the run-up to the election, or during the process of forming a coalition government, we suggest they might want to take advantage of price corrections to build positions in companies which are listed here but have a strong global footprint and are not likely to be heavily impacted by any turmoil in the domestic economy.”

Investors should also be mindful of the effect on the currency, says Daniel Ellis, head of investments British Isles at RBC Wealth Management. “Historically the pound has been very sensitive to political events. We saw sterling weakness last year in the run up to the Scottish referendum. So far this year sterling has been relatively indifferent to what has been happening around the election, but we do see the election having an effect.”

It seems likely that volatility, particularly in sterling, could be more pronounced and last for a longer period of time after the election date, agrees Nick French, head of UK Wealth Management at Russell Investments. 

“With no clear outcome and further uncertainty about how markets might respond, there are better risk-adjusted returns available. In time, the uncertainty of the election may impact asset prices (and most likely sterling) to offer attractive opportunities. Until then, we’ll watch the play begin to unfold.”