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The stark difference between Labour’s and the Conservative’s ideological and Brexit negotiating stances makes today’s election the most important in recent memory. Like Brexit, the potential impact for the FTSE 100 is colossal, especially as markets are pricing in a comfortable Conservative victory…
Are the polls wrong again?
Brexit remains an unadulterated reminder of how polls and the collective intelligence of the markets can be wrong. Lest we forget, the FTSE 100 plummeted 549 points on the following day post the UK’s Brexit vote.
As I write, election polls point to a 50-seat majority for Theresa May’s Conservatives in today’s election. However, modelling investor turnout (expected to be a crucial factor to the outcome) as well as individual constituency idiosyncrasies is notoriously difficult. Here we note that support for the Conservatives has remained steady and hence whether Corbyn has been able to galvanise the politically disenfranchised and the ‘youth-vote’ is key.
With this in mind, let’s breakdown the three likely outcomes of today’s election and report the impact each will have on the FTSE 100.
The potential outcomes
Firstly, scenarios we assess are as follows: 1) a large Conservative victory (100+ seat majority), 2) a slim Conservative majority (30-50 seat majority) and 3) a hung parliament. Interestingly, this election sees our outlook for UK equites being less driven by the impact of individual party manifesto’s. Instead, we overweight the impact of how the above scenarios will impact ‘Brexit’ negotiations, the pound and subsequently the FTSE 100.
Large Conservative Majority
Were May to win a 100+ seat majority then this would unequivocally strengthen her Brexit negotiating hand. Crucially, it would also afford her the ability to stave off calls for the hardest of Brexits, as some Tory back benchers are baying for. Moreover, a large majority would dramatically reduce the likelihood of a ‘no-deal Brexit’ and see the Conservatives better placed to push their business friendly mandate. Under this scenario, expect a modest appreciation in sterling and an outsized equity rally. Here, investors should favour domestically focused sectors (specifically the banks, housebuilders and retailers). However, timing will be key as a ‘pop and drop’ move would be very much on the cards.
Slim Conservative Majority
We view this outcome as the most likely and this is what market is pricing in. Although a leadership challenge might well be on this cards if the majority is to the lower end of the 30-50 range, for now we discount this. Under a slim Conservative majority, the cloud of increased uncertainty surrounding Brexit should see equities come off initially, albeit marginally. However, the prospect of a weakening pound should temper this selloff as largecap exporters drag the index back higher. Here, look to move long tobacco, mining and oil stocks.
Hung Parliament
Markets hate uncertainty and a hung parliament would most definitely result in a huge chunk of this. Under both a Labour or Conservative led minority government, the effects of MP’s wrangling over how to approach the UK Brexit negotiations would be crippling, and at the very least result in negotiating delays. The possibility of a ‘no deal’ Brexit would be maximised and in turn sterling would sell off sharply.
Here we would expect consumer sentiment to be hit hard and see equities fall decisively lower. Yes, sterling weakness plays will eventually become of interest, but waiting for risk aversion to settle will be paramount.
As such, all eyes will be on the exit poll-based projection at 10pm. With the overall result expected to be clear between 3am and 5am, an enthralling night is ahead of us!
