Hung Parliament Investment

Hung Parliament Investment and the UK Economy

by Joanne Roberts, Director - 7 May 2010

As predicted by us, the General Election has resulted in a hung Parliament, the first since the Election in February 1974. 

Kingmaker

Whilst the Liberal Democrats failed to increase their lead in the opinion polls, Nick Clegg could still play the role of kingmaker.

Gordon Brown is entitled to remain as Prime Minister until a government that can command the confidence of Parliament is found.

Whilst Labour ministers are now saying they would be prepared to offer electoral reform as an incentive to the Liberal Democrats in order to work as a coalition, without the support of the Liberal Democrats Labour would still be short of an overall majority. Labour would still need the support of other minority parties.

The Conservatives will now be the largest party in Parliament although they have to wait for developments or to form a coalition. They have already said Labour has lost the mandate to govern but uncertainty still remains.

Historical Precedent

In 1974, the Election in February was followed by another in October where the Labour party did mange a very small majority. With the aid of the then Liberal Party Labour remained in power for another 5 years.

Whilst this could happen in the same way now, the added uncertainty of our economic situation means a decisive government is badly needed and may result in another election if concensus is not reached.

Sterling

As expected, the lack of direction meant that Sterling weakened to $1.47 and markets have opened down this morning.

The only recent comparison for a hung Parliament is 1974 (the previous one was in 1929 just ahead of the Great Depression). There was significant underperformance in the markets and even after the small Labour majority in October 1974 equity markets fell another 20%.

1974 was the time of industrial strife and high inflation caused by the Middle Eastern oil crisis, ending with the UK seeking aid from the IMF. As is the case today, the economy and the country were in a major crisis.

If you compare 2010 to 1974, equity and corporate bond markets are on a far more global scale with increased international trade. Also, the UK stock markets derive 70% of their earnings from overseas so the UK economy is less significant. 

Stability means less volatility

The UK is particularly vulnerable in international markets because of our large debt to GDP ratio and an annual fiscal deficit that is not much smaller than Greece’s. The rating agencies have already warned the UK it is at risk of losing its AAA status if it does not present a credible plan to reduce the deficit post the Election.

The result of the Election, therefore, is likely to create more uncertainty when we least need it. It is vital the leaders of the parties get together soon to sort out an administration that can act with authority and decisively. 

In summary, markets will be volatile until a stable government is formed.  Sit tight.  Sterling and stockmarkets will recover in the short term and whilst sterling make take many years to recover, continued stockmarket growth should return.

Tips:

Gilts:  Sell Fixed Coupon, Hold Index Linked, don't buy new gilts

UK Equities: Hold - Neutral for now

Corporate Bond: Hold - Buy new

Global Equities: Buy US, Far East, Japan - sell Europe.

Property: Buy

Gold:  Sell after this new post election mini-gold-rush