Personal Investing
Ed Monk, Fidelity Personal Investing 19 Apr 2017 04:34pm

UK election will test market resolve once again

SPONSORED FEATURE: British voters will go to the polls in a general election on 8 June, subject to a parliamentary vote approving the move

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Caption: The vote will be the fourth big test in three years for the UK.

Prime minister Theresa May announced this morning that she will table a motion in parliament this week to bypass the Fixed-Term Parliament Act that would otherwise bar an election until 2020. A two-thirds majority is needed in parliament to secure a new general election.

That majority is expected, with opposition parties unlikely to want to be seen as turning down the chance to turf the government out. Both Labour and the Liberal Democrats have indicated that they welcome the announcement.

The dividing line of what will be a short campaign was plain in the prime minister's words as she announced the vote: Brexit, and her assertion that re-electing the Conservatives is the only way for voters to makes sure that the UK really does leave the European Union.

With public opinion on Brexit largely unmoved since the vote to leave last June, it would appear the strategy is based on sound logic.

Throw in the fact that the Labour party is at historic lows in the polls, and the prime minister will surely feel confident that she can secure a new, possibly larger, majority in the House of Commons.
That does not, mean, however, that an election does not spell more uncertainty for the economy and markets. Recent history has shown that previously unthinkable results can occur, and markets are bound to move about as newsflow changes in the weeks ahead.

UK investors at least cannot say they lack practice in coping with binary political risks. The June election, should it go ahead, will be the fourth potentially transformational vote they have sat through in under three years, following the Scottish independence referendum in 2014, general election in 2015 and EU referendum 2016. You can throw in the Trump/Clinton presidential election of late last year as well.

The lesson of those events has been that it is not simply an election's result that is uncertain, but the market's reaction to it too. You may have called the Leave result correctly, but the fall in the pound, and boost to dollar-dominated FTSE 100, was harder to spot. Likewise, the Trump victory was feared on economic grounds, yet markets have soared since his election because his plans, whatever else their merits, were ultimately seen as stimulating to consumption.

As such, predicting market moves in the weeks ahead feels a mug's game, despite the apparent certainty of the result. One possible scenario is that a larger majority for the government will embolden it to pursue its current Brexit strategy, which appears to include a willingness to accept a hard Brexit if negotiations with the EU don't yield something closer to our current status.

Crucially, a new mandate would push back the election that follows this one, potentially until 2022. This would remove an important time pressure as the government reaches the end of its Brexit negotiating period in 2019, allowing the prime minister more breathing room to play brinkmanship with the EU.

The pound strengthened today after markets digested the election announcement. This perhaps shows that the market sees the prospect of a larger government majority as a stabilising factor, even it that would also appear to make a cliff-edge exit from the EU more likely.

Investors should rest assured that any turmoil will come and go, with old uncertainties replaced by new ones. Asset prices may move in unforeseen ways, but balanced portfolios, invested for the long term with an eye on cost, have a track record of riding out unpredictable news events.

Ed Monk

Ed Monk

Ed joined Fidelity in 2016 following a 13-year career in newspaper journalism, most recently as investment editor at The Daily Telegraph. He was previously news editor and personal finance editor for Thisismoney.co.uk, the money channel for Mail Online and has contributed articles to the Daily Mail.

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