The UK Election and The Markets

May 1, 2015 by

The UK general election is just around the corner, it comes up on the 7th of May. This is the most unpredictable election in recent times; it is too close to call. The leading parties are Labour and conservative without any clear majority at the moment. This has created so much uncertainty in the market thereby increasing the market volatility.

Whichever party wins has different policies and programs which could impact the market positively and negatively. Labour Party’s policies are generally perceived to be against the growth of the economy most especially top earners and top business. Labour has reinstated their commitment to tackle the issue of non-domicile status which allows some group of individuals save some of their taxes. Labour has also promised to tax bonus of big earners and also to introduce the 50p tax for top earners. It has also introduced mansion tax for properties worth more than £2million and the party also promised to gradually reduced deficit as time goes on. The party also promised to abolish the zero-hour contract and raise the minimum wage to £8. The conservative party has disagreed with Labour on some grounds regarding there clamp down on the wealthy and non-dorms. They argued that it will drive away foreign investment and make the economy worse-off.

Investors has perceived the approach of either party from different perspective. Most investors are so cautious of taking an investment decision at the moment because of political uncertainty based on the outcome of the election. Overall, most business chiefs are against the policies of the Labour party, they argued that it might take the nation’s economy backward.

Furthermore, Conservative party has also highlighted a possible referendum in 2017 with regards to Britain’s future as an EU member. The UK is currently EU’s biggest trade partner. An exit from the EU will have a significant impact on the UK economy. It will hurt the free trade agreement between the UK and EU countries. This will have a great impact on trade and income from abroad.

However, traders and investors are patiently anticipating the outcome of the election. Hedge funds and asset managers have been giving different opinions regarding the election outcome. Goldman Sachs said a Labour win might trigger a sell-off on FTSE 100. Blackrock said sharp market movements are not inevitable after election outcome.

In real market sense, traders will look to sell Sterling and FTSE100 on a Labour party win, while traders might take a long position on the back of conservative party victory.

Looking at basic macro-economic indicator of the UK economy, the trade deficit of UK is currently between 5-6%. This is a factor that could actually have some negative impact on the strength of sterling after the election. This is the biggest deficit in the G7 economy. In other to correct the deficit, the economy needs more inflows of capital from abroad. A Labour win means a hunt for the non-dorms and increase income tax: this is likely to drive away investors and consequently reduce foreign direct investment. Conservative are also likely to call for referendum for a possible exit from EU. These policies from either party are going to have more structural effect on the economic growth of the UK.