UK’s General Election and its Potential Impact on Financial Markets

Britain is due to poll for the snap elections on December 12, 2019. The investor community is monitoring the developments very closely, and opinion polls are bringing back volatility in the British currency and stock markets every day through their latest survey results.

Amid heightened volatility over future political setup in the UK, investors have taken a cautionary stance and monitoring the development with an intention to build their positions post the General Elections.

A broader index of the UK the FTSE 100- which gauges the movement of the 100 large-cap companies by market capitalization, recorded large swings post general election announcement made by the British Prime Minister, Boris Johnson. On the general election announcement date (October 28, 2019), FTSE 100 ended the trading session at 7,331.28, and since then it has registered a high of 7,446.00 (as on November 27, 2019) and a low of 7,197.33 (as on November 21, 2019), respectively, which reflects the volatility of around 250 points. And at the time of writing the as on December 03, 2019 at 09:49 AM GMT the index traded 51 points or 0.69% lower than its previous close at 7,235.89.

During the same period, the mid-cap index of the UK-the FTSE 250, which gauges the movement of the top 250 mid-cap companies by market capitalization, which ended the October 28, 2019 session at 20,210.16 and since then registered a high of 21,029.84 as on 28^th November 2019 and a low of 20,021.50 as on October 31, 2019. At the time of writing the as on December 03, 2019 at 09:50 AM GMT the index traded 45 points or 0.21% lower than its previous close at 20,656.83.

The British Pound also recorded large swings since the date of the general election announcement, as it ended higher in the October 28, 2019 trading session at 1.2865 against the US greenback and since then it registered a high of 1.2901 and a low of 1.2769, respectively.

However, investors are aware of the fact that a stronger Pound will first benefit domestic stocks over those having revenue source largely from abroad. That's why an increase in FTSE 250 index, which majorly represents domestic stocks, delivered relatively higher return and steady growth as compared to the broader FTSE 100 because an appreciation in Pound will bring currency transition losses for the majority of FTSE 100 stocks. As FTSE 100 is by large recognized as global equity benchmark which reflects movement in some of the world's largest companies, because a majority of FTSE 100 company's revenue comes from the foreign market, mostly from the United States. So, appreciation of US Dollars against Pound benefits their top-line and bottom-line as well.

On the other hand, an appreciation in the British Pound helps domestic companies as import of raw materials, interest payment in foreign currency and other foreign obligations would be relatively cheaper.

Earlier many were under the impression that the UK would be locked in political deadlock for an extended period of time, but the impasse over EU Withdrawal would come to an end by December 13, 2019 when election results will be announced. The prevailing political turmoil over the past three and half years has caused unusual swings in the British Pound as well as in the domestic stocks.

British Pound, domestic stocks and real estate were the most beaten up asset classes in the UK's financial markets since the Brexit referendum took in June 2016. The lager volatility in the UK's domestic stocks was brought up by significant plunge in Pound Sterling against the basket of major currencies in the world and especially due to steep discount against the US Dollar.

From 1.5020 level against the US Dollar on the eve of Brexit referendum to 1.2984 in the December 03, 2019 session, the British currency has plunged approximately 13.5% in the past three and half years. Also, during the same period, it has touched a historical low level of 1.1452 against the US Dollar.

Meanwhile, opinion polls are indicating a victory of PM Johnson-led Tory Party in the upcoming general elections. However, historically, UK’s politics is quite unpredictable, and a large set of potential outcomes is possible. Ex-Prime Minister Theresa May was also confident enough, when she took parliament for a snap election in 2017, that he will secure an absolute majority and will be able to deliver Brexit. But things turned against her, and she lost few of her own party seats in the 2017 snap elections.

Now PM Johnson is heading for the same goal, as his efforts were not enough to deliver Brexit within the previous deadline of October 31, 2019.

However, opinion polls are indicating PM Johnson's victory, and the result of the snap election could have a significant impact on the UK stocks, global equity markets and major currencies.

Three consecutive attempts to deliver Brexit, based upon deals negotiated with Brussels, led to Theresa May’s departure in June 2019.

After all the efforts and continuous claims that the UK is well prepared to crash out of the EU bloc as on October 31, 2019, PM Johnson finalized a withdrawal deal with EU members as on October 17, 2019. However, the recently elected PM witnessed similar headwinds as his predecessor as British Parliamentarians attempted to block the deal.

However, House of Commons finally approved the newly negotiated deal of the PM Johnson but recognized that three-days' time is not sufficient to assess the bill and voted down the deal's timetable. Opposition Parliamentarians also forced PM Johnson to seek a further extension. This led PM Johnson to decide to let people decide on the fate of the United Kingdom and announced the date for a snap election.

This provided the investors’ community a sense of faith that PM Johnson would secure a majority at the house of commons, which will break the political and Brexit impasse. However, opponents are under the impression that snap election would bring an end to Johnson's tenure and Labour Party will secure a majority and renegotiate a new Brexit deal.

History tells us that the stock market delivered higher returns under the Conservative Party’s previous government’s tenure as compared against the ruling Labour Party’s tenure.

However, Brexit has higher weight on the upcoming general elections.

The recent movement in Pound post-snap election announcement reflects that the number of times opinion polls have indicated PM Johnson's return with absolute majority. Â Sterling has gone higher against the basket of major currencies and Vice-a-Versa, which clearly indicates that Johnson's victory would strengthen British currency, which will provide a boost to UK's domestic stocks as well.

On the other side, the market is considering a less probability for Jeremy Corbyn taking oath as British Prime Minister after the elections; however, opposition parties’ election manifestos have brought large volatility in currency and equity markets.

Corbyn's radical plans like nationalization of utility companies, and partial nationalization of telecom services provider BT Group, new Brexit referendum and renegotiation for another Brexit deal would have huge impacts on the British currency and economy altogether.

However, a hung parliament will be the worst outcome of December General elections and will let the Brexit head into uncertainties for an extended period of time, which would have unexpected impacts on the British currency and on the other investment asset classes of the UK.

Also, it will turn back foreign portfolio investors, those who have recently shown their intension for investment in the UK equity markets and claiming that UK equities could be the best potential global equities in 2020.