Hanging tough for hung parliament

With a decisive outcome now very unlikely the UK is set for days or weeks of uncertainty after 7 May as negotiations take place on forming a new government. Online investment manager Nutmeg revealed this week it has reduced savers’ exposure to the FTSE in favour of Europe, Japan and other regions because of the political instability it expects next month. It warned too that global investors would sell off UK holdings over the coming weeks in anticipation of the pound falling further. The upcoming election is also behind a sharp fall in the Hargreaves Lansdown Investment Confidence Index this month, said Laith Khalaf, senior analyst at the firm. “The general election has given investors a bad case of the jitters, though they remain pretty sanguine about the longer term prospects for the UK stock market,” he reported. A conclusive outcome generates its own uncertainties, albeit sometimes due to outdated perceptions of the different parties economic priorities and competencies. A Tory win has traditionally had a calming effect on markets, yet such an outcome would raise the prospect of an EU referendum that would have its own unsettling effect on domestic and overseas investors. It may also increase the chances of a fresh Scottish independence referendum over the next few years. But is there a danger of attaching too much importance to the identity or composition of the next government? “The incoming government of whatever hue will still have an uphill struggle to balance the books, whether this is by trying to rein in expenditure or spending and investing to stimulate further growth,” said David Thomson, chief investment officer at VWM Investment Management in Glasgow. The extent of common ground between the main Westminster parties on matters such as the budget deficit implies that any compromises from a coalition are unlikely to have a direct economic impact, believes Simon Lloyd, chief investment officer, Murray Asset Management. “For the most part, therefore, our inclination would be to sit tight in those assets whose risk was appropriate for investors before the prospect of 7 May raised its head,” he advised. Instead UK investors are more likely to be affected by themes such as falling commodity prices, ongoing eurozone concerns and interest rate decisions. “Governments can only fine tune the economy and there will be many other factors, such as global interest rates and the price of oil to name just two, which may have a much larger impact on the UK economy than who sits in Number 10,” said Thomson. The greatest investment risk lies in the historically high valuations of many of the major asset classes, said Lloyd. “Therefore if investors wanted to take risk off the table there are precious few places – from a purely valuation perspective – to turn,” he added. Perhaps the biggest fear in the context of the political climate is of a currency crisis, particularly if negotiations over a new government drag on. The last time a sterling crisis seemed possible was in May 2010, when sterling fell sharply against the euro and the dollar as it became clear the election would produce a hung parliament. But that election-related nervousness is already reflected in the value of sterling, according to Tim Wishart, head of Psigma Investment Management’s Edinburgh office. “Sterling has already weakened considerably against the US dollar and we believe is already pricing in much of this uncertainty,” he said. “Whilst sterling is relatively strong against the euro, we have to remind ourselves of the relative context given the problems that the eurozone already faces.” Sterling weakness against the dollar has its advantages for investors, he pointed out. “This should support UK large cap companies as they translate their dollar earnings back into sterling and in turn this should help cushion any equity weakness in the UK following the election should there be a hung parliament,” said Wishart. “In short there could be short-term volatility, but this should be limited for UK investors.”