8th May 2015
The election outcome has come as a shock to everyone, including voters, politicians and markets.
The FTSE and sterling rallied this morning as it became clear by early morning that David Cameron would be leading the country for another five years as head of a majority Conservative government.
The Tories hit the magic number of 323 seats at 11am this morning, meaning they needed just three more votes to take them to a majority with 12 constituencies yet to declare.
Here the experts give their first thoughts on what the new political landscape means for investors:
Rates to stay low as austerity picks up
Tony Nangle, head of multi-asset, EMEA at Columbia Threadneedle Investments
The Conservative party’s result…is stronger than we were anticipating and it has been greeted warmly by financial markets.
Equity strength is being led by stocks that investors expected to be squeezed by Labour – the banks, government contractors, and the bus, train and utility companies whose businesses depends on terms that are set largely by Westminster.
Gilts are rallying on the prospect of a pick-up in the pace of fiscal austerity, which will squeeze the economy, and in so doing push back expectations of rate rises by the Bank of England.
Initial sterling strength has been informed by the lack of short-term uncertainty over government coalition negotiations. The risks that come with a Conservative victory (in the form of further referenda) appear to be a little too distant to make their way into currency traders’ calculus.
Relief rally to be sustained
Tom Stevenson, investment director at Fidelity Personal Investing
Investors dislike uncertainty so the market’s positive reaction to the much more definitive result than expected is not surprising. In the short-term I would expect the relief rally in the pound and equities to be sustained.
However, in some ways one kind of uncertainty has simply been replaced by another, and attention may soon focus on the constitutional and political questions over Scotland and the EU. According to our research, investors remain upbeat about the stock market with a quarter (26%) of investors saying they are likely to increase their exposure to the UK.
Need for diversification
Chris Williams, chief executive Wealth Horizon
Today’s surprise result has highlighted even further the importance of diversifying investment portfolios.
Investors should not try to second guess what’s happening, but instead should diversify their exposure and make sure they are not taking too much risk on any one market. No one could have predicted the results of the election – with the polls well wide of the mark – and therefore the only way to protect portfolios is to spread risks across a variety of assets.
However, not everyone advised this, and indeed some investment firms openly tried to predict what was going to happen, going as far as suggesting clients short the FTSE.
Anyone that took such action will today have missed out on some decent returns, with the market soaring in reaction to the surprise majority for the Conservative party. In contrast our approach, focused on diversifying across various investments, continues to offer the potential to make attractive long-term returns and protect yourself on the downside from inevitable bouts of volatility.
Hard work on fiscal consolidation needed
Neil Williams, group chief economist of Hermes Investment Management
By suggesting a strong, unambiguous government and avoiding a messy coalition, the election outcome looks palatable for financial markets. The absence of the policy vacuum that could have prevailed on an inconclusive result has removed the risk of a short-term hit to UK assets, with the pound being the instant beneficiary.
There is hard work still to be done on fiscal consolidation, as sign-posted in March’s pre-election Budget. The fiscal screw will have to stay tight if the underlying budget deficit is to be whittled down, and returned to the black by 2018/19 as promised by chancellor George Osborne.
First, the deficit is still high. Even including special items like the transfer of the Royal Mail Pension Plan and QE, the around 5%-of-GDP deficit for 2014/15 will still be the G7’s widest after Japan.
Which means, for markets, a blend of fiscal consolidation – whether skewed toward spending cuts or tax rises – and measures to preserve the recovery will prove as important in the new parliamentary term as it was in the last one.
The unlikelihood now at least of having to forge lengthy negotiations to form a new coalition should help limit the risk premium on the pound.
In which case, with CPI inflation still low, the Bank of England’s MPC can easily justify ‘sitting on its hands’ on interest rates till nearer the next scheduled Budget, in spring 2016.
More austerity coming
Azad Zangana, senior European economist at Schroders
For investors, a clear victor removes a tremendous amount of uncertainty in the near-term over the ability of the government to govern and legislate.
Otherwise, in the near term, the clarity delivered by the election will boost activity as households and businesses can take investment decisions with greater certainty over tax and regulation. Looking further out, the projected election results give the Conservatives the mandate to continue to implement its austerity plan, even if that plan has been eased in recent years. Government spending cuts are likely to continue, particularly in welfare payments where the government had sought to increase the relative gains for a return to work versus living on welfare.
With Cameron promising more money for the NHS and vowing not to increase taxes until the end of the decade, it makes it even more important for the government to find those efficiency savings and clamp down on tax evasion if fiscal targets are to be met. The fiscal deficit remains high at just over 5% of GDP, while the current account deficit is also close to record highs – highlighting a lack of domestic savings relative to domestic investment growth.