One Thing is Certain . . .

AS I SIT to pen (or rather, keyboard) this article, it is raining. It is cold, and grey, and raining. The beautiful autumn leaves are being stripped from the trees, the fireworks are over, and, to cap it all, we have a General Election to look forward to. This appears to be because the Prime Minister is not “dead in a ditch”, and “do or die” the UK is currently still in the EU. This particular state of affairs is to be settled by having an election, it seems. Whilst it may be seen by some as a single-issue vote, there is probably a greater divergence between the major political parties than for the best part of 40 years, and their policies may have massive implications on financial markets. Let us examine some of the impacts of possible election outcomes.

Firstly, a Labour majority. If the manifesto promises are implemented, then it is pretty certain that the Stock Market will be adversely affected. The proposed taxation changes will not please Big Business, and the re-nationalisation and compulsory share give-away, however well intentioned, would have an immediate adverse effect on share prices. A Labour-led coalition, or pact, may have the effect of diluting the most contentious of the policies, and thus lessen the impact on share values. The plan for dealing with the EU issue is to re-negotiate the current deal, and then refer to the electorate for what would seem to be either confirmation of the deal, no deal, or remaining in the union.

A Conservative majority, or minority government, as long as it was a pro-leave administration would more than likely have a positive effect on markets in the short-term, as sterling would probably be weakened, and a significant percentage of the earnings of the largest UK companies is derived in dollars. The more deleterious effect is likely to come from the increased cost of our leaving the EU. Clearly, it would depend on the exact nature of the future deal, but the 2018 government analysis estimated that a Free Trade Agreement with the EU would see UK GDP between 4.9% and 6.7% lower, compared with staying in the EU, depending on immigration policy. In fairness, depending on the source, the figures vary between -0.1% and -9.5%. Trade with the EU under this scenario is estimated to be 25% lower, and 5% higher with non-EU countries than if the UK remained in the EU. A member of the Monetary Policy Committee of the Bank of England has stated that the Bank has calculated the cumulative total of lost GDP since the 23 June 2016 to be something of the order of £55 billion.

Should there be a predominantly Liberal Democrat administration, the avowed intent is to revoke Article 50 but would probably settle for a further referendum. Given the strengthening of the pound against the euro since the possibility of a no-deal scenario, the revocation of Article 50 would be likely to boost the pound and reduce the value of FTSE100 company earnings. However, the majority of larger businesses would like the stability and predictability that would come with this scenario. As I have said many times, markets love stability, and hate uncertainty.

Clearly, whatever the outcome, we have no idea of exactly what will happen economically. One certainty is that markets are cyclical, and whether stock prices rise or fall initially, they will go up over the long-term. We are more than 10 years away from the financial crisis and markets have done very well over those years. I have a suspicion that we may be in for a somewhat bumpy ride in the foreseeable future, but I’ve been wrong before. In any event, remember the following: investing is a long game. Amass some savings first and then invest. Little and often works well, and if you can, buy cheaply and when things look expensive, sell a bit!

But for now, never mind the politics, have a wonderful Festive Season.

David Foot

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