What Does This Surprise Election Mean for Investors?

P1's CIO looks into how different results could play out for investors.

2 minute read

The surprise move by Rishi Sunak on 22nd May to have an election on 4th July, took most commentators by surprise. The Prime Minister only met his commitment made earlier in the day for an election to be held in the second half of the year by the slenderest margin. The decision to have an early election has perplexed many observers, with the Conservative party so far behind in the polls, the likelihood of an electoral victory appears slim. Speculation on Sunak’s rationale for the early call has focused on a possible deterioration of the economy and political situation over the coming months, against the more positive recent data.

With polls consistently giving the Labour party a 20-point lead over the Conservatives, pundits are giving the opposition a 90%+ chance winning the most seats and forming the next government. However, six weeks is a long time in politics and particularly within a campaigning window. Many elections have ultimately focused on issues that were not obvious prior to campaigning. For example, in the 2017 election, the Conservative party was polling 45% against Labour on 25% when the election was called. The election result was only a narrow win for the Conservatives at 43.5% over 41% for Labour, with the swing driven by Theresa May’s plans for to reform social care.

For markets, negative outcomes are not anticipated. The dispersion between the two main parties is the narrowest for many years and investors may well take stability in the political situation, following an election, as more of a positive than any nuanced policy differences. The “negative” outcome, may therefore be a weak minority government, or hung parliament, as these naturally increase political instability. Any need for the SNP to support a weak Labour minority, and the likely condition of another Scottish Referendum, would not be taken well for domestic investments, or the pound.

As usual, a diversified portfolio across asset classes and geographies can provide insulation from binary regional, political events. Outcomes can be both positive or negative, although it is worth remembering that the most common reaction by markets to political events is ultimately apathy, and they are often quickly forgotten.