While everyone has known the election was highly likely to be held in May for a couple of years there has been a notable uptick in scrutiny.
This may in large part be media lead of course. Channel Four’s ‘100 days of UKIP’ mockumentary being a notable example of how the election has moved from something in the background of people’s minds to front and centre of the mainstream. This programme was followed soon after by the BBC with its hilarious documentary on UKIP’s Thanet operation, which seemed more like a piece of scripted satire.
An interesting juxtaposition to this is that just as it has happened, the FTSE 100 index has been approaching its all-time record high. On both Monday and Tuesday this week in fact the index crossed the record line of 6930 points, closing in record territory yesterday at 6949.
There are a lot of reasons to be bullish on the UK economy to keep in mind. The plunge in the oil price is putting extra money in consumers’ pockets, inflation is very low without straying into deflation and unemployment keeps falling.
Despite this, as people think more about the election generally people who invest in UK companies will be thinking more about what the election means for their portfolios.
The election could quite conceivably derail UK stocks as it gets nearer. One thing equities markets never respond well to is uncertainty, and polling data suggest this election will create uncertainty like no other before it in recent history. Not only is UK domestic policy at stake, but the nation’s membership of the European Union as well.
If you see this scenario as likely then the next few weeks could represent a rare opportunity to take profits on UK stocks, with a view to buying back in at lower prices when the dust from the election fallout has settled.
Rathbones head of multi-asset David Coombs is of this school of thought. He has been whittling down his UK exposure ahead of the election.
“The biggest risk in the UK is the election in May,” Coombs said. “Whatever the outcome it is a concern. If we get a Conservative win we head into a referendum on membership of the EU which creates massive uncertainty. If Labour win we don’t really know which policies they will actually implement, but they are talking about France style social polices and markets don’t like that.”
“Then there is the risk that there would be a Labour government held up by the SNP or Lib Dems, as well,” Coombs added. “The uncertainty that that would create is also not good, and in the case of the SNP having a separatist party in the UK government would be viewed very badly internationally.”
Then there is the prospect of not being able to form a government at all and having to have another election later in the year, which would ramp up the uncertainty and spin it out over a much long timeframe, Coombs noted.
Many UK equities managers will be watching the election coverage and polling data nervously over the coming couple of months. They by definition have to be invested in UK shares of course, but you don’t.
