Why a hung Parliament would be a disaster for the markets
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’Equity investors would just assume there would be policy stasis, infighting and indecision’
Harrison: ‘Risk appetite would reduce
Financial experts believe that a hung Parliament after the next general election could be a disaster for markets.
Speaking at a Threadneedle round table in London last week on the outlook for the UK in the run-up to the election, head of UK equities Leigh Harrison said the equity market would regard a hung Parliament as “a disaster”.
He said risk appetite for equities would suffer as investors would react negatively to uncertainty over the Government’s ability to deal with the public sector debt. Harrison said: “The equity market would regard it as a disaster.
The market is looking for strong leadership. I do not think either party has got particularly strong leaders but you would have thought with a reasonable mandate for one or the other that they might have the confidence to take some decisive policy steps.
“There is a campaign at the moment to try and get the electorate comfortable with the idea of a hung Parliament but I think that equity investors will be far more cynical. They would just assume there would be policy stasis, infighting, indecision, all of the things that you do not really want when you are dealing with the issues that we are dealing with.
“I think that risk appetite in equities would reduce because the assumption would be that you would get a muddle for a fair while and I do not think they would regard that as a positive outcome at all.”
Head of government bonds Quentin Fitzsimmons said a hung Parliament would be equally unwelcome for the gilt market. He said: “The increasing possibility of a hung Parliament is unwelcome because the balance of power will be unclear at a point in time in the cycle when the deficit issue is abs-olutely critical.
“If there is a bit of a hiatus as a result of the election in terms of seeing a way to bring the deficit under control, then I am afraid the government bond market will probably lose patience with the situation.”
Fitzsimmons said there are some safety mechanisms that would support sterling but the short-term effect on the currency would be uncomfortable.
He said: “There would be the concern about when the rebalancing would eventually occur and sterling would pro-bably stay on the back foot in that environment.”
Milestone Wealth Management principal Neil Mumford says: “It would not be good. There is nothing worse than two parties that could argue over policy decisions, particularly with the deficit we have got.
“The recovery is going to take a long time so the market this year is going to be tricky to call but it does make it worse when you have not got a majority decision. I think it will create more nervousness for equities than there is currently.
“We have seen a lot of turbulence in the market already this year and that would continue if we were in a situation where there was a hung Parliament.”
But Alan Steel Asset Management consultant Alan Adam says the outlook for the country looks bleak, irrespective of which party is in power.
He says: “To some extent, we would probably prefer a hung Parliament to the Tories getting in as we do not think the economy is at the stage where it could cope with the dramatic cuts they are planning.
“A hung Parliament or even Gordon Brown and his cronies getting back in might at least leave the same fiscal policy in place which would allow us to recover fully before we start the stringent cuts that are required.”
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Readers' comments (6)
John Blackmore | 22 Feb 2010 3:23 pm
Long Term a hung parliament might be the best thing for this country - bringing real change to the voting system . Yes Alan - short term I would certainly prefer a hung parliament to the Tories putting the country into depression.
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Blair Cann | 22 Feb 2010 3:57 pm
This is a load of nonsense masquerading as news. Short term is not the basis on which to judge equity performance.
If we have a hung parliament one of two things will happen; either the biggest party will subsidise sausages and butter for a few months to win over the housewife's vote (a classic strategy executed by Harold Wilson in 1974) with a view to having another election in a few months time and securing a working majority, or we would have a genuine coalition government which after a few months everyone would accept and normal service would be resumed.
Either way the longer term outlook for equities is relatively sound and in any event will not be determined by the size of the government's majority or lack of it.
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John Shackleton | 22 Feb 2010 4:12 pm
Why should cuts cause a problem? It depends how and where. There is so much waste in the public sector that significant savings could be made with no downturn being caused.
Harsh, but as every penny for a public sector job (including the taxes they pay so dont bring in that argument) has to be generated by tax on the private sector (or borrowing), the cost of these people on benefits is a lot less to the country than keeping them employed.
Get rid of all the non-jobs. Put real business prople in to run NHS etc cutting out self serving managerial departments that just eat money and dont provide a benefit to anyone.
However, ensure that you keep spending on capital projects that will feed the recovery in private sector. Indeed, invest further in these that will improve the actual infrastructure of UK plc. This solves the problem of cutting early to cause a double dip and not cutting at all as it avoids both.
The people made redundant from the public sector can then seek employment in the vibrant private sector and contribute in a meaningful way to UK plc - a giver not a taker!
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Anonymous | 22 Feb 2010 4:59 pm
"Strong leadership" has given us wonderful economic performance over the last few years hasn't it.
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Anonymous | 24 Feb 2010 2:09 pm
Just think of the ecomony in 1997 and how it looks now. Would anyone in their right mind want this in the hands of Labour or a hung parliament?
Current problems can be traced back to the raid on Pensions by GB in 1997, worsened by the pandering to the FS industry subsequently to falsely prop up the position of UK plc for log enough to get the PM job after TB left.
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Anonymous | 24 Feb 2010 4:16 pm
Just think of the ecomony in 1997 and how it looks now. Would anyone in their right mind want this in the hands of Labour or a hung parliament?
Current problems can be traced back to the raid on Pensions by GB in 1997, worsened by the pandering to the FS industry subsequently to falsely prop up the position of UK plc for log enough to get the PM job after TB left.
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