A Conservative Win Will "Boost Markets Short Term"

How will the stock market react to the General Election outcome? We model a Conservative majority win, a narrow margin and a hung parliament

Karen Kwok 6 June, 2017 | 4:29PM
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With less than two days to go until the UK snap General Election, opinion polls suggest a mixed picture around the likely outcome from the June 8 vote.

The latest poll from YouGov this morning showed support for the Conservative was at 42% compared with 38% for Labour. This is a far cry from the 20 point lead the Tories enjoyed when Prime Minister Theresa May called the election on April 18.

A poll by Survation for ITV television yesterday gives an even narrower lead for the Conservatives, ranging to just 1 percentage point over the Labour Party.

That said, political events last year have taught investors to be wary of polls. If their predictions were accurate Hillary Clinton would now be living back in the White House and Britain would not be leaving the European Union.

Putting the polls aside, there seems to be three most likely outcomes from this week’s UK General Election. We asked the financial professionals what they believed the stock market would do in each of these scenarios.

Majority Win by the Conservatives

“Our base case scenario is that the Conservatives will win by a large majority and that the stock market and the pound will initially rally on that,” said Andrew Sheets, chief cross asset strategist with Morgan Stanley.

This is because a majority win by the Conservatives means the least disruptive political outcome – and stock markets like certainty.

In terms of sectors, healthcare and defence stocks will benefit from May’s Conservative government, said Ritu Vohora, head of equities investment communications with M&G.

However, as it will also increase the odds of a harder Brexit, in the long term, sterling will go down and it could potentially offset the gains in the UK equity market, Sheets added.

“How the market reacts to the first three month of the Election could be very different from what will happen 12 months after,” said Sheets.

A Conservative government could lead to a higher risk of a major increase in barriers to trade, research from Morgan Stanley read. This will keep business investment sentiment weak, which might affect the share price of UK companies.

The sterling will be an important factor in UK stock market performance, said Graham Secker, chief Europe equity strategist with Morgan Stanley.

“Correlations between the FTSE 100 and sterling have never been greater since the EU Referendum last summer. When investors ask me about the stock market response to the General Election, I would say it depends on the currency. However, I think the election potentially does not have long-lasting impact on the UK equity market,” said Secker.

A Narrow Majority for the Tories

Conversely the UK stock market might sell off on a narrow win by the Conservatives, even if in the longer term that might reduce the odds of a harder Brexit, said Sheets.

“The market dislikes the uncertainty – which would be a narrower than expected Conservative win. But under our forecast that also includes the odds of a softer Brexit, which will be more consistent for the pound trading in $1.30 to $1.40 range,” said Sheets.

A disruptive hard Brexit, with a cliff-edge outcome could lead to acrimonious negotiations and this may be anticipated by markets in the second half of 2018. This implies a greater hit to growth, and potentially an easing package, according to Morgan Stanley research.

A Hung Parliament

To have a majority rule in House of Commons, a political party needs to take 326 seats. Anything less that will lead to a hung parliament. A recent example of this was when the Conservatives and Liberal Democrats formed a coalition in 2010.

While the YouGov poll suggests the Tories will have 304 seats in the 650-seat British parliament – which could lead to a hung parliament, Morgan Stanley’s Secker said it would be “a big surprise” to the market.

“A Corbyn-coalition would lead to the pound going down to low $1.20. While the past nine months suggests that a fall in sterling would lead to a rise in equity market, I think you will like to see that correlation break in that scenario,” said Secker. “This is because a coalition would lead to uncertainty on whether the country will deliver business-friendly policies.”

However, John Why-Evans, head of investment strategy at Investec Wealth & Investment, holds a different view, arguing that the FTSE 100 will continue to follow global trends owing to their heavy overseas earnings exposure, with a weaker pound providing a boost. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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