Much has been written, and will continue to be written, about the battle between the parties and a great deal of this analysis discusses the potential economic consequences of party policies. This note provides a more general discussion about a possible outcome: that on 7 May there will not just be no clear government of the UK, but no clear path to forming one.
The 2010 Coalition
After the 2010 General Election, although no clear government emerged, the path to forming a government was clear. Whether the Liberal Democrats joined with Labour or the Conservatives, a government with a workable majority would be formed. Mindful of the pressures on the market, the players gathered round a table and agreed on coalition in less than a week.
Polling on the 2015 General Election
Currently, polling for the General Election is as follows: Conservatives 33.4%, Labour 32.2%, Liberal Democrats 13.7%, UKIP 10.5%, SNP 3.2%, others 7%.
This result would yield the following seat count: Labour 283, Conservatives 281, SNP 36, Liberal Democrats 27, others 23. Given that 325 seats are required for a majority, no two parties (other than the Conservatives and Labour, who have never governed together apart from a time of national crisis) could form a majority. Throw in potential constitutional constraints on the third largest party (the SNP, which would draw all its MPs from Scotland, where there is a devolved government), and it is clear that (if the polling is right), there will be a great deal of uncertainty over who will form a government.
Market Consequences
In the event of such an election result, there are two possible views the market might take. The first is that which was feared in 2010. Faced with uncertainty as to the UK government and potential policy directions with significantly different economic consequences, foreign investors could reduce UK exposure with potential softening of equity prices and rising Gilt yields.
On the other hand, Belgium recently went 589 days without a government following an election in 2010. Although there was significant fluctuation within that period (unsurprising given the problems afflicting the Eurozone at the time), after nearly 600 days of coalition negotiations, the yield of Belgium’s 10 year bond finished less than 0.5% higher than the day the election took place: hardly a significant increase. The US has lacked a united government for years, as the Republican-controlled House of Representatives clashed with the Obama White House. In 2013 this division got so bad that the US government shut down – during the shutdown bond yields on the US 10 year bond fell and the S&P 500 climbed higher. Around the world, coalition governments are common in democracies with successful economies, and even protracted coalition negotiations do not tend to result in serious market convulsions. Indeed, economic progress often shrugs off such occurrences.
Conclusion
Coalitions have not been commonplace in the UK, which may cause nervousness. In addition, there are currently significant geo-political issues which may cause instability around the world. However, in our view, the best strategy for investors may be very British indeed: Keep Calm and Carry On.
Risk warnings
This document has been prepared based on our understanding of current UK law and HM Revenue and Customs practice, both of which may be the subject of change in the future. The opinions expressed herein are those of Cantab Asset Management Ltd and should not be construed as investment advice. Cantab Asset Management Ltd is authorised and regulated by the Financial Conduct Authority. As with all equity-based and bond-based investments, the value and the income therefrom can fall as well as rise and you may not get back all the money that you invested. The value of overseas securities will be influenced by the exchange rate used to convert these to sterling. Investments in stocks and shares should therefore be viewed as a medium to long-term investment. Past performance is not a guide to the future. It is important to note that in selecting ESG investments, a screening out process has taken place which eliminates many investments potentially providing good financial returns. By reducing the universe of possible investments, the investment performance of ESG portfolios might be less than that potentially produced by selecting from the larger unscreened universe.
