A 60-second guide to a Christmas Election

If Christmas shopping and office parties weren’t already enough to think about, Prime Minister Boris Johnson has managed to shoe-horn in a December General Election for the first time in almost a century, as he bids to get a fresh mandate for Brexit and break the deadlock in Parliament.

The Prime Minister had hoped to have an exit sorted by 31 October. However, like other Brexit deadlines before, it came and went and Johnson – possibly regretting his previous statement that he’d rather be dead in a ditch first – was forced to request a delay until 31 January 2020. The European Union later confirmed the “flextension”.

All roads now lead to Thursday 12 December. It will be the third General Election in the past four years. As Julian Chillingworth from Rathbones pointed out: “Every vote costs the country about £130 million to organise. But there are roughly 52.4 million adults in the UK, so that’s less than £2.50 a pop. Direct democracy for less than the price of a London latte.”

But with markets uncertain and the UK distinctly unloved by investors, could a General Election be a positive or negative inflection point for markets? FundCalibre is here to give you guide on what to expect.

Why are we having a Christmas election?

Since 2017, one of the biggest challenges Theresa May (and now Boris Johnson) have faced is that parliament, like the original EU referendum vote, is split on the subject and there is a lack of a political majority in Parliament in favour of any course of action. This has made it almost impossible to make any positive moves on Brexit: however, an election could bring about a change in the number of seats held by each party and a change in the MPs holding those seats.

Is it a calculated risk by the Prime Minister?

Very much so. At the time of writing, the polls and the bookmakers both predict a hung parliament – although earlier in the week they were predicting a Conservative majority, so who knows? The levels of uncertainty seen in the last General Election look likely to be repeated on this occasion – this is because the issue of Brexit will likely be as important to voters as traditional party politics, an issue which transcends party political lines.

The Brexit party is a major threat to a Conservative majority. Led by Nigel Farage, it wants Brexit to happen as soon as possible, and without a deal. This version of Brexit could attract enough voters to split the support for Brexit and ultimately allow the Labour party and Liberal Democrats to make gains.

What are the likely outcomes?

A recent research note from Close Brothers pointed to three likely scenarios*.

  1. Conservatives win a majority
    This is currently the most likely of the three but by no means a foregone conclusion. The Conservatives will be hoping to win a majority in order to make passing laws easier, including the Withdrawal Agreement Bill. The Prime Minister will also be hoping the new seats in Parliament will be sat in by those more willing to follow the Party line on Brexit and not rebel. In this scenario, Close Brothers expects Number 10 to push forward with the deal Johnson agreed with the EU and the UK’s resulting relationship with the EU to be more distant.
  2. A Labour victory
    If Labour were to win it would probably be forced to seek a coalition with another party in order to instigate a closer relationship with the EU, allowing them to run the country. Close Brothers says this may curb some of Labour’s more radical proposals, and would likely lead to a second referendum, with “remain” an option on the ballot paper.
  3. No majority
    This is the scenario many of us dread to see again – where no party is able to form a majority government. This would make any laws being passed or general progression on Brexit a struggle.

Aside from the scenarios outlined above, it remains possible that Labour wins a majority, or the Brexit party or Liberal Democrats win more seats than expected.

What should investors do in these markets?

The UK stock market is likely to be increasingly volatile based on polling data in the run up to 12 December.

If you are an optimist and believe we will get a majority government and a Brexit deal by 31 January, then you could consider a number of UK centric funds, which are looking to take advantage of the fact UK equities are currently undervalued due to uncertainty.

The likes of the Jupiter UK Special Situations fund, managed by Ben Whitmore, or the Montanaro UK Income fund, are both well-positioned to take advantage of improved sentiment in the UK.

Those with less confidence may prefer to invest in UK funds with a greater exposure to larger companies, with greater international-based earnings. For example, the Artemis Income fund or the Threadneedle UK Equity Income fund, both of which have reasonable exposure to FTSE 100 companies.

The pessimists, who believe the Brexit uncertainty story still has some way to go, may look to cast the net wider by investing globally in a fund with capital preservation at its heart, such as the JOHCM Global Opportunities fund or Morgan Stanley Global Brands fund, which have 13% and 21%** in the UK respectively. Investors may also choose a multi-asset offering, such as the Jupiter Merlin Growth or the TB Wise Multi-Asset Growth funds.

 

*Source: Close Brothers Asset Management, Investment Insight, 31 October 2019
**Fund factsheets, 30 September 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.