Above page content

    Site map  Cookie policy

Features

How will an election impact the UK stock market?

Boris Johnson is trying to get an election to unlock the Brexit impasse. What would the effect of an election be on the UK equity market?

Garry white employee

by
Garry White

in Features

09.09.2019

The UK stock market and the pound are already pricing in a mountain of political risk. Equities listed in London are under-owned by global investors and sterling is flirting with multi-decade lows. But, if Boris Johnson manages to get the election he wants, could a fractious campaign actually make things worse?

While not exactly discounting Armageddon, UK shares have already got a significant amount of doom and gloom in their valuations. However, with sentiment around politics driving markets at the moment rather than fundamentals, such an increase in uncertainty could have a negative effect. That’s because it not only increases the unpredictability of the Brexit outcome, but it adds another significant risk factor to the mix; a Jeremy Corbyn government.

The City wants a deal

It is clear that the City is generally against a no-deal exit. When Boris Johnson lost his majority earlier this week after Philip Lee crossed the floor to join the Lib Dems, the pound reversed the day’s losses and spiked higher within seconds. Foreign currency markets cheered the fact that the chances of the UK leaving the EU without a deal had diminished. Indeed, two major City players also declared this week that they thought a Jeremy Corbyn win would be less harmful than a no-deal Brexit. While accepting that a Corbyn premiership would be damaging, both Citi and Deutsche Bank indicated it was the lesser of two evils. So, with the chance of an election being called soon, how is the campaign likely to impact the UK market?

In general terms, an election will, ultimately, be positive. It is clear that the current parliament is defunct and incapable of making progress. So, in theory, an election will allow a new government to be formed that will be in a position to forge a way forward and provide clarity for business and investors. The reason UK equities are currently under-owned is because the future remains unclear.

However, there are issues associated with a Jeremy Corbyn government that are likely to see some sectors hit during the campaign. Labour plans to reverse the privatisation trend instigated by Margaret Thatcher and buy back some companies on the cheap. Shares in these businesses are likely to underperform should Labour’s campaign go well. These include the three listed water companies United Utilities, Severn Trent and Pennon, with National Grid and SSE shares also in the frame. Other sectors under threat from nationalisation include rail, so businesses such as FirstGroup will be under pressure as will outsourcer Serco, as it runs the Caledonian Sleeper franchise. Other companies that are likely to be impacted include defence contractor Babcock and the Royal Mail.

But perhaps the most controversial Labour policy for investors is its Inclusive Ownership Funds (IOF) proposal, which requires any company with more than 250 employees to transfer 1% of its shares each year into a trust fund for its workforce, up to a total of 10% of the total equity. This will happen though open market purchases of shares in the market for the benefit of the employee fund, or by issuing shares as a scrip dividend. The latter would result in a 10% dilution in dividend payments to shareholders over a decade. However, the most controversial part of the policy is that each worker’s payment from the fund will be capped at £500 a year, with dividends over that amount being sent to HM government so Jeremy Corbyn and John McDonnell can decide how they are spent, or “redistributed”.

Political risk rises

Law firm Clifford Chance calculated that the loss to investors from IOF would be more than £300bn, including a cost to UK pension funds of £30bn. However, it noted that the benefit to employees would be limited to around £1bn per year, with most of the dividends going to government. Clifford Chance says its legal analysis had identified a number of serious impediments to the proposal. However, even if the chances of it being implemented are slim, it still increases the political risk for equities in the UK.

One potential reassurance for investors is that an overall Labour majority appears pretty unlikely. This week, a poll from YouGov revealed that, in a choice between a no-deal Brexit and a Jeremy Corbyn government, 48% would prefer to leave the EU with 35% opting to put the Labour leader in Downing Street. Should Mr Corbyn achieve the seemingly impossible and become prime minister, it is likely that it would only be possible as part of a coalition that would temper any excessive policy proposals. This means that it would be wise not to panic in any market wobble created by the threat of a Labour government and use any sharp falls as a buying opportunity.

There is no doubt that an election campaign would be fraught. However, the FTSE should react positively to any falls in sterling, as the currency acts as a hedge because of the index’s high proportion of foreign earnings. So, for investors in UK markets, the election should prove no more of a concern than recent events and, ultimately, provide a light at the end of the tunnel. If it produces a route out of the current impasse it can only be regarded as positive. So, for investors, an election is really nothing to fear.

A version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Get in touch

Find out more

Our focus on clients has endured since the foundation of Charles Stanley in 1792 and has helped make us one of the UK's leading wealth management firms. Your interests give shape to everything we do.

Please call us to talk about your circumstances or complete the enquiry form.

020 3797 1783

Make an enquiry

£

We store your data in accordance with data protection legislation and our privacy notice. You can unsubscribe at any time by clicking the link in our emails or emailing us

Local Office

Your local office

Your local Charles Stanley office can help advise you on a wide range of investment management services.

Select an office

Share

Newsletter banner signup