Victory, actually?

Following one of the most divisive UK General Election campaigns in recent memory, a weary electorate heads to the polls. With traditional party loyalties being tested, the outcome is far from certain. Investment Specialist, Kirsty Clark, reflects on the current political landscape, a changing electorate, and how markets might react to Friday’s election results.

The past five weeks have seen one of the most divisive UK General Election campaigns in recent memory, and the outcome of the December 12 vote is proving to be one of the most unpredictable.

The Brexit debate has driven a wedge through traditional party loyalties; this election campaign has become a battle of ideologies above all else. Views on both sides of the debate have become increasingly entrenched, and the polarisation in politics has been mirrored in the electorate.

Where the two main parties have, in the past, governed from the centre, in recent years they have moved in opposite directions, vacating the middle ground and offering two distinctly different propositions. The nature of voter support has morphed in response, and old party allegiances are being tested.

An uncertain electorate

The number of voters not identifying with one political party has risen, according to the BES [1], a survey conducted since 1964; almost half (49%) of the people surveyed changed the party they voted for at least once in the elections between 2010 and 2017. A sample study also revealed that, in the 1960s, more than 80% of voters identified with a single political party. As we head into the 2019 general election, this figure has dropped to less than 50%. With around a quarter of potential voters still undecided in the final days of campaigning, the election result is far from certain.

The latest polling – a hung Parliament in sight

In the latest YouGov MRP polling [2], the Conservatives remain on target to win a majority of 339 seats, with Labour on 231 and the Scottish National Party (SNP) on 41. However, the Conservative party’s lead has more than halved since the same polling was undertaken two weeks ago. The prospects of a hung Parliament are now within the margin of error. To win a nominal majority, the Conservatives need 326 seats, although for various reasons the number required to command a working majority can be fewer than this. For example, the Speaker of the House rarely takes part in voting, while Sinn Féin MPs refrain from taking up their seats in Parliament, and so do not cast a vote either.

Campaign strategy

To help to secure a majority, the Conservatives have been channelling resources into traditional labour strongholds – the so called ‘red wall’ constituencies – in the north of England, the Midlands and Wales, in the hope of drumming up support from Leave voters. The Conservatives look to have successfully picked up some potential Labour and Brexit Party ‘Leave’ voters, while also managing to retain many party-loyal Conservative ‘Remain’ voters.

In contrast, by swinging further to the left and taking a neutral stance on the issue of Brexit, Jeremy Corbyn’s Labour party has failed to capitalise on the Conservatives’ shift in approach under Boris Johnson. Labour has been leaching the hitherto party faithful who wish to leave the European Union, while struggling to connect with more moderate ‘Remain’ voters. Concerns that failure to stamp out anti-Semitism in the party has exacerbated the Labour leader’s woes, and Corbyn’s approval rating among voters has plummeted. In Scotland, Labour polls a distant third (18%) behind the SNP (41.5%) and the Conservatives (28.5%) [3].

Interestingly though, the Labour leader has been closing the gap in the final few weeks of campaigning. This has been down to the party winning back some of its 2017 support, and also potentially squeezing the Liberal Democrat vote. It has coincided with growing concerns around the future of the NHS – with healthcare overtaking Brexit as the most important issue for voters, according to a November Ipsos MORI poll [4]. For Leave voters, the NHS has grown increasingly important, with more than three in five (62%) prioritising it, just shy of Brexit (63%). Among Remain voters, the NHS (64%) still leads Brexit (59%) as a key concern. While both parties have vowed to invest more in the NHS, Labour’s policies and concerns that a Conservative government could privatise the NHS seem to have resonated with a growing proportion of the electorate.

Although Jeremy Corbyn’s approval ratings have received a boost in the final days of polling, both of the main party leaders remain deeply unpopular in the court of public opinion. In the Ipsos MORI survey last week, net satisfaction ratings for Boris Johnson and Jeremy Corbyn stood at (-20%) and (-44%) respectively [5]. Favourability ratings have improved for both leaders throughout the campaigning, but the net figures for each remain negative.

Tactical voting

The Brexit debate has proved such an emotive issue that the nation has been divided into one of ‘leavers’ and ‘remainers’. Little has been resolved in the past three years and, in what has been dubbed ‘the Brexit election’, voters are again having to grapple with some stark choices. With so many voters feeling disenfranchised, and with the stakes so high, tactical voting could be a deciding factor in this election. There are more than a dozen seats where the smaller parties have worked together in a ‘remain alliance’ – standing down candidates to give a single ‘pro-remain’ candidate the best chance of winning against a Conservative rival.

Pro-remain parties in Northern Ireland have been adopting a similar approach, working together across a number of constituencies to create the best opportunities to defeat the DUP. Despite the DUP’s confidence and supply agreement with the Conservative government, a recent LucidTalk poll revealed that only 38% of Unionists now back ‘Leave’, with 41% in favour of ‘Remain’ [6].

On the Leave side, Nigel Farage announced in November that the Brexit Party would give way to the Conservatives in hundreds of seats, offering them a clear run. However, with no mention of a formal cross-party agreement, his motivation to do so has been called into question and, in the final days of campaigning, the Brexit leader appears to be having a change of heart.

‘At risk’ seats

As with any contest, there are winners and losers. While voters will be keeping an eye on who will be collecting the keys to Number 10 and leading the country through the next five years, punters have been weighing the odds of some high-profile candidates potentially being unseated in a number of highly-contested constituencies. Big name casualties could include Conservative leader Boris Johnson and Foreign Secretary Dominic Raab. The Liberal Democrats’ Jo Swinson and Chuka Umunna could also be at risk.

How will markets react in the aftermath?

Since the EU referendum in June 2016, the pound has been a barometer for sentiment surrounding the Brexit debate. Sterling saw a sharp drop off in the immediate aftermath of the referendum, as the unexpected ‘Leave’ result came in. Since then, it has been relatively rangebound and yet to return back to its pre-referendum levels.

Sterling has been strengthening more recently, with the rising prospect of a Conservative majority. Despite a dip on Wednesday, after the latest YouGov poll pointed to a narrowing Conservative majority and the possibility of a hung Parliament, the currency made back most of this early weakness, and remains strong as we head into polling day.

Equity markets have been relatively sanguine amid the Brexit turmoil, with sentiment being reflected through sterling volatility. However, if the vote results in a large Conservative majority, in the short term we would expect to see markets react favourably to the prospect of a more stable government, despite the ongoing uncertainty around the Brexit timetable and the nature of the future relationship with the EU. The more domestically-focused FTSE 250 companies would likely rally ahead of their larger cap FTSE 100 peers. Financials, consumer discretionary and construction materials stocks would likely benefit the most. The pound would also strengthen and we could see UK gilt yields rise.

A Labour majority is the least market-friendly scenario, and could potentially cause a great deal more market volatility. While the party offers the prospect of a renegotiated deal or the potential to remain in the EU following a confirmatory vote, the interim uncertainty – along with the party’s tax-heavy, nationalisation/anti-privatisation agenda – could cripple sentiment. This would weigh heavily on share prices and send the pound spiralling down.

A hung Parliament scenario would result in continued political uncertainty, so we could see the pound weaken or trade sideways, with markets showing some signs of volatility until there is greater clarity.

One final thought…

As we head to the polls on a soggy Thursday in December, given the uncertainties, the unknowns and the undecideds, where we land on Friday morning is at best a ‘guesstimate’. If the last few election polls have taught us anything, it’s that, while we can sample the mood of the electorate, it’s only after all the votes are in that we can see the full picture. With ‘electoral shocks’ becoming the norm, don’t be surprised if Friday morning brings the unexpected.

[1] Fieldhouse, E., J. Green, G. Evans, J. Mellon & C. Prosser (2019) British Election Study Internet Panel


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