What the election in the UK could mean for the market?

It is one of the closest races |in decades, with opinion polls |showing voting intentions are |almost evenly split between the two main parties, Conservative and Labour.

The election outcome is highly unpredictable, yet it could have profound implications for the world’s sixth-biggest economy.

For the markets, investors |should be concerned about |political impacts in four main |areas: government stability; the |UK’s membership of the European Union; its fiscal path and the |extent of austerity; and Scottish |independence.

Government stability

 

Opinion polls suggest neither of the main parties will win a majority. Prime Minister David Cameron’s Conservatives and the main opposition Labour Party are neck-and-neck, each with support levels of about 33 per cent to 35 per cent.

The most probable form of the next government would require |either the Conservatives or Labour |to form a coalition with possibly |more than one of the smaller |parties. With a long history of outright majority government in the UK parliament, a coalition of this sort could prove difficult to govern and produce an unruly parliament that hampers decision-making and the legislative process.

In the last parliament, the Conservatives led a two-party coalition with the third-largest party, the Liberal Democrats.

 

EU membership

There is the threat of a “Brexit” – a British exit – from the EU if the Conservatives return to power. Cameron has pledged to renegotiate the terms of UK membership with the EU and promised to hold a referendum by 2017 on whether the country should leave the EU.

Regardless of the result, the referendum would lead to a period of uncertainty for the markets.

 

Fiscal path

The new government will determine the pace and efforts to reduce the size of the public debt, which currently stands at a relatively high at 90 per cent of gross domestic product.

There is significant disparity on the government spending plans among the main political parties.

The Conservatives’ plan is literally the most “conservative” and should deliver the fastest reduction in the debt-to-GDP ratio.

The Labour Party, on the other hand, is more generous as it plans to finance more spending on social services via tax increases.

A Labour victory, in this case, should provide a short-term push for the economy, but the country’s credit rating could be at risk if a Labour-led government failed to rein in the public debt level.

 

Scottish independence

Last September, Scotland went to the polls to decide whether it would become an independent country. Although the referendum result kept it part of the UK, the support base for the Scottish National Party continues to grow.

Polls show the SNP could gain more seats in the upcoming general election, from just six seats currently to more than 40.

The issue of Scottish independence may be on the agenda sooner than expected if the SNP gains a share of power in parliament.

Last year, the International Monetary Fund warned that Scottish independence could result in financial market turmoil, as it would raise a number of important and complicated issues, such as the currency that Scotland would use and the scope of the Bank of England. 

 

Komsorn Prakobphol is head of strategy at Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com www.tiscowealth.com or [email protected] [email protected].