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Hung over

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Six months ago, a Conservative victory at the upcoming general election seemed to be more or less assured.

Gradually, speculation over the prospect of a hung Parliament crept into commentary and began to be factored into investors’ thinking. Hung Parliaments are notoriously bad for markets in the UK, with the increased likelihood of a political stalemate, and a paralysis of governmental process. This threatens to be particularly damaging at a time when financial markets are demanding a coherent plan of action to bring the UK’s public debt mountain under control. Markets are now, however, beginning to consider a third possibility – another Labour majority.

Despite having much to lose or gain from election outcomes, investors struggle to make accurate predictions. This is partly due to the limited usefulness of opinion polls, which often have a margin of error of 6 or 7 per cent. Rather than focusing on the swings of opinion polls, investors are better off trying to assess on a more qualitative basis whether a sea-change has occurred in public opinion. Such a change was tangible in 1997, when the arrival of New Labour energised an electorate tired of a Tory Government. Similarly, 1979 saw Thatcher elected as the antidote to a bureaucratic Labour movement in thrall to the unions.

Are we at a similarly pivotal moment now? The electorate certainly seems disillusioned by the incumbent Government, with the Iraq war, economic woe and various scandals contributing to a severe lack of confidence in Labour.

But the public seems to be no more enthusiastic about David Cameron’s Conservative party. People are suspicious of the polished, media-savvy front to the party and its perceived lack of definition. But the Tories are committed to immediate cuts while Labour hesitates among a population that has lived through the “great moderation” and steady expansion of the public and private sectors.

Investors should consider the possibility of Labour victory. The party has little fiscal credibility with markets and will not be taken seriously until it recognises the need to tackle the mountain of debt. The budget was in surplus in 2001, in deficit by £43bn in 2008 before bank nationalisation, and the Institute of Fiscal Studies now puts the deficit at £166bn. With no sign that Labour is willing to address the deficit, demand for government bonds may dip, forcing yields up further, and weakening sterling. Indeed, sterling could fall to parity with the euro, which has its own problems.

In this environment, good asset allocation calls coupled with superior stock selection will be vital in providing returns. It may be useful for an equity investor to have the ability to take short positions, diminishing the market directional risk they are exposed to. It is also important to be aware of any home bias in portfolios. Diversification is always important but the possibility of the UK falling out of favour with financial markets makes it even more pertinent. A spread of geographical and currency risks in a portfolio, as we seek to maintain in the Ignis multi-manager funds, will help to moderate the risks that will face the UK should Labour win another term.

Simon Mungall is head of multi-manager at Ignis Asset Management

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There is one comment at the moment, we would love to hear your opinion too.

  1. It is clear Cameron is better than Brown. I hope he will reveal more still in the manifesto. Voting this government in again would be devastatingy stupid given how it has wrecked the economy.

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