The firm said in an election preview that such a scenario would be akin to Spain being governed by a party which relies on support from Basque or Catalan separatists.
With or without an SNP alliance, BlackRock also said it believes a Labour government would be ‘tough on business’ and may be perceived by the markets as ‘lacking fiscal responsibility.’
While a victory for the Conservatives would remove this threat, it would raise issues of its own in terms of a period of uncertainty in the run up to the promised referendum on Britain’s continued membership of the European Union, BlackRock noted.
This all means ‘a soothing outcome for markets is hard to imagine’ in BlackRock’s view.
BlackRock said the ‘relatively calm’ markets suggest a smooth and swift government handover, but the firm believes this view is too complacent and it expects volatility in the value of the pound and other UK assets.
The main financial challenge for the new government will be cutting the budget deficit BlackRock said, and any backtracking on the pace of this reduction by a Labour government would likely lead to a temporary sell-off in gilts and steepen the yield curve.
This could also result in a rise in inflation expectations and bring forward the timing of interest rate hikes, BlackRock noted.
